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GRC Professional : GRC Summer 2012
IN DEPTH 20 GRC Professional • Summer 2012 enterprise-wide exercises that usually take place about once every six months for Australian banks. Generally speaking, the more readily available the information, the easier it is to stress test routinely by plugging numbers into a computer model. Darryl Newton, Chief Risk Officer for BOQ says smaller stress tests can include looking at exposures to specific portfolios. “You might want to stress your exposure to a geography if that is of concern,” he says. “You could stress for changes in government policy. You may wish to challenge your risk appetite, as seeing how something performs under stress can be very informative.” Larger scale stress tests, such as those required by the Australian Prudential Regulatory Authority (APRA), usually take between six to eight weeks to complete. APRA requires all authorised deposit-taking institutions (ADIs) in Australia to undergo stress testing and report certain parts of their results to APRA (which the regulator does not reveal publicly). APRA then combines the numbers to assess the overall strength of the banking sector. APRA particularly focuses on the requirement from the international Basel II framework for banks to have a minimum 4% of Tier 1 capital. (This will increase to 6% once the Basel III requirements take effect - they will be phased in over a two-year period commencing 1 January 2013.) In 2010, APRA issued a report about the strength of the Australian banking sector, which concluded that none would have failed under the “severe but plausible” economic downturn scenario that the regulator modelled in its own stress test, which assumed unemployment rates of up to 10.8% and a 12% drop in house prices. The APRA stress test also found that none of the ADIs would have breached their Tier 1 capital ratio requirement if such a downturn occurred. APRA also made observations about the stress testing being carried out by the banks, noting that institutions have increased their demands on risk managers without necessarily increasing the resources available. “As a result, there has been an increasing pressure on stress testing resources, creating significant key person risk,” APRA’s Paul Tattersall, Head of the Industry Analysis Team, wrote in the report. What makes a good stress test? The APRA report also noted differences in the stress testing processes from bank to bank, with some better than others. “Currently there is a diversity of approaches in modelling the relationship between scenarios and losses,” Tattersall said. “Some ADIs model a linear relationship between deterioration in broad economic parameters and X Stress testing is a way of getting all our staff prepared for the real event, instead of just saying: “Well, we passed”, and forget about it. George Yau CFO, Rabobank Living wills One outcome of the GFC was the concept of ‘living wills’ for banks, whereby they have plans in place if they look like collapsing. Living wills can be placed into two categories: • Recovery plans: focus on measures for raising additional capital or breaking up the business. • Resolution plans: focus on measures for a regulator to wind up the business where recovery is not possible. APRA is working internationally with the Basel Committee and Financial Stability Board to develop living will arrangements to suit Australian conditions. As part of this work, APRA has established a pilot program with Australia’s largest banks, which were required to develop draft recovery plans by the end of 2011. Finalised plans, signed off by their boards, are required by June 2012. Improve your skills ACI runs courses for risk managers to improve their skills: Compliance & Risk 101 This is a full-day introductory course for those new to the compliance and risk profession. ISO 31000: Putting the international risk standard into practice Formerly called Risk 202, this one-day workshop explores the differences between ISO 31000 and the AS4360 and explains how to benchmark your existing frameworks against the international standard. For course details and dates, visit www. acigrc.com or email Caroline.Lee@ acigrc.com
GRC Spring 2011
GRC Autumn 2012