APRA devises rating system for risky business

TheAustralian Prudential Regulation Authority(APRA) will use a new system to assess the more than 3000 financial institutions on its radar screens for regulation.

The new system will be known as PAIRS, or Probability And Impact Rating System, and is hoped to significantly bolster the powers of the regulator to monitor institutions in its care.

APRA chief executive Graeme Thompson believes the new PAIRS system will put the watchdog in a stronger position to gauge the scale of its supervisory task. The PAIRS system is designed to identify priority areas within the regulated population and allocate resources according to the degree of risk, as well as monitoring market trends in risk profiles.

“APRA’s ratings are for internal use, but regulated entities will be in no doubt as to how we view them as PAIRS is progressively introduced across industry over the next two years,” Thompson says.

APRA will be assigning one of four different ratings to financial institutions: normal, oversight, mandated improvement and restructure.

A ‘normal’ rating means APRA is collecting and analysing data and making routine onsite visits, while ‘oversight’ means that the information gathering and inspection process is stepped up as well as sending strong signals to the Board of the relevant company that the regulator is less than comfortable with its position.

If a group gets the ‘mandated improvement’ tag, then they will be directed by APRA to present and execute a business plan that quickly restores financial stability, as they have been deemed by APRA to be operating in an unsustainable way. But APRA will step in and take the reins if a ‘restructure’ rating is applied, as entities have failed or at risk of failure. In this last scenario, APRA will be using its full enforcement powers to effect the changes.

APRA says that PAIRS will be implemented progressively from October.