30 per cent of institutions require APRA oversight

The chairman of the Australian Prudential Regulation Authority, John Laker, has revealed that as many as 30 per cent of the financial institutions supervised by APRA have some element of their operations requiring higher than normal examination.

In a speech delivered to company directors in Adelaide in early August, Laker said that while 70 per cent of institutions fell into the “normal” category requiring no action on the part of the regulator, most of the remainder fell into the “oversight” category — meaning they “had some aspect of their risk position or operations — such as minor but persistent weaknesses in the control framework or insufficient capital — that requires more extensive examination”.

He said that only a very small percentage of institutions being overseen by APRA fell into the categories worse than “oversight” — “mandated improvement” and “restructure”.

“‘Mandated improvement’ institutions are operating outside APRA’s acceptable bounds for prudent risk management,” Laker said. “These institutions must have a sensible remediation plan and they may be subject to more intense supervisory attention via formal directions or enforceable undertakings, although APRA’s persuasive powers and a cooperative response are often sufficient.

“Institutions in ‘restructure’ are no longer viable in their current form and need some combination of new management, new ownership or new capital, or a new business arrangement,” he said. “As you would expect, these institutions are subject to vigorous supervisory intervention.”

Laker said that currently, around 70 per cent of APRA’s risk-rated institutions were in the “normal” category and almost all the remainder were in “oversight”, with only a small percentage in the “mandated improvement” or “restructure” categories.

“Ideally, APRA would like to see institutions in the ‘normal’ and ‘oversight’ categories improving, or at least not deteriorating, and institutions in the ‘mandated improvement’ and ‘restructure’ categories transitioning to those other categories or exiting the industry, preferably without loss to beneficiaries.”