Just in case this blog would be thought of as an APRA “love-in” I thought a quick piece on where APRA are not doing well (compared to where we would hope they would be, rather than other regulators) on their Basel II implementation would be in order. There are several areas where APRA are not doing well. Most are in the practical application of their various standards that relate to Basel II in Australia. There are also several areas where the guidance is lacking, even though it would be a critical input to the whole compliance framework.
One of the main areas still open is around how the banks demonstrate compliance. Up to this point, the majors have had a few visits from APRA and a sign-off on their data processes from an external party (mostly their auditors). One of the major questions going forward is: “What, exactly, do the sign offs involve?” Many of the models the banks are using for compliance are very complex, involving gigabytes of data accumulated at the banks over many years. Some of the data goes back 25 years or more. Are the auditors (and others providing sign offs) expected to:
- Go through all the data for all of those years and make sure it is materially correct?
- Understand the models to a sufficient depth to say they are materially correct? and
- Provide comfort that, in every location where those models are being used, they are being used appropriately?
If not, what is being signed off on?
The home-host issues with Basel II compliance are the subject of long
debate, so I will not do more here than attempt to make it relevant.
The problem is that APRA are not providing guidance on this, so local
branches and subsidiaries of overseas banks are in limbo at the moment.
In places where APRA diverges from international practice (and there are a few – mostly explainable) which one predominates or does the local entity have to apply both standards where they are different? True, over 80% of Australian banking assets are not covered by any home-host issues, but some firm guidance here would be very useful for the 20%.
The old bugbear is still there. What is a stress test? Despite the BCBS’s ‘clarification’ on this topic, covered below, there is still no effective coverage on this. To be fair to APRA on this, the FSA, with much greater resources, has only just got some decent papers out on this (see here and here), but it should not still be on open question. If APRA just repeated the FSA guidance it would at least be a good start.