Nowhere to run to, nowhere to hide. APRA update rules on contagion risk

In this article, Liam O’Brien, GRC Solutions’ Senior Consultant is going to explain about the APRA update to rules on contagion risk 

The title sounds a little dramatic but perhaps no more so than the term “contagion risk” which APRA are using to describe risks arising from associations and related entities of ADIs.

The Prudential Standard in question is “APS 222 Associations and Related Entities” which was re-released by APRA to address “… concessions in the existing framework [which] led to some ADIs establishing operations in foreign jurisdictions, which are managed and funded within the domestic bank…” John Lonsdale APRA Deputy Chair.

Clearly, some ADIs were taking advantage of these structures (which are outside APRA’s jurisdictional visibility) often in attempts to shift costs and/or manage regulatory capital.

What’s new in APS 222

APS 222 will come into effect on 1 January 2021 which should provide impacted businesses with sufficient time to address complex requirements such as “step-in risk”, which occurs in circumstances where an ADI is required to support an entity that is of questionable relatedness.

Other key areas of interest for ADIs are:

  • Extended definition of related entity to include common material shareholders and directors;
  • Obligations and requirements for the assessment of contagion risk(s);
  • Removal of options for ADIs’ overseas entities to be regulated via APRA’s Extended Licensed Entity Framework;
  • Changes to limits of exposure for ADIs with overseas subsidiaries; and
  • Changes to requirements for ADIs with associations to fund management vehicles.
Where’s the impact

APRA reports that the final version of APS 222 is considerate of the feedback, suggesting the initial proposals may have been an overreach or not particularly considerate of practical implications.

The impact is most likely going to be felt the most by those who are relying on associations and related entities to better manage regulatory capital and this is not always for dishonourable purposes.

As is often the case, smaller players who have the same regulatory burden to shoulder as the big end of town may see find this to be one hurdle too many, at a time where the timing of (frequent) regulatory changes is seemingly out of step.

Source: APRA

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An article written by
Liam O’Brien
Senior Consultant