The 2007 Article IV report by the International Monetary Fund (IMF) mentions that banking supervision in Australia meets very high international standards, and that prudential supervision by the Australian Prudential Regulation Authority (APRA), the banking sector supervisor, is well established. The IMF conducted a Financial Sector Assessment Program (FSAP) for Australia in 2006 and concluded that Australia has a high overall level of compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision. The IMF's Detailed Assessment (published in 2006) of banking supervision in Australia also indicates that Australia is compliant with 26 of the 30 BCPs (considering that Principle 1 is divided into 6 subsections), largely compliant with 3, and materially non-compliant with 1. The report rates Australia materially non-compliant with BCP 15 relating to the monitoring of banks for money laundering activities. The 2008 Article IV report by the IMF notes that the Australian authorities have made progress in addressing this issue, and the Anti-Money Laundering and Counter-Terrorism Financing Act was passed in December 2006 with the aim of addressing many of the weaknesses pointed out in the 2006 FSAP. In general, the IMF's 2006 assessment and its subsequent reports point to very favorable banking supervision practices in Australia. Moreover, Australia has moved towards a risk-sensitive framework of supervision with the adoption of the Basel II framework in January 2008.

General Overview

Australia's financial system is healthy, profitable, and resilient to shocks, and its banks are well-capitalized with high asset quality. The above observation comes from the 2007 Article IV consultation report published by the International Monetary Fund. Similarly, the "Public Information Notice" section of this report also notes that the prudential supervision by the Australian Prudential Regulation Authority (APRA) - the banking sector supervisor - is well established and "continues to be refined" (p. 3). The report further affirms that the APRA is attuned to the vulnerabilities inherent in the system, including cross-border linkages with the New Zealand banking system, and large bank exposures to the household sector and is directing its supervisory efforts in raising the awareness of the authorized deposit-taking institutions (ADIs), including banks, credit unions and building societies, of the risks associated with mortgage loans in light of the sub-prime mortgage crisis in the U.S. The 2007 IMF report finds that though some potential vulnerabilities identified by the 2006 Financial Sector Assessment Program (FSAP) continue to linger, the Australian authorities "have endorsed the key recommendations of the FSAP" (p. 10) and are working towards implementing some of them including formalizing the framework for failure resolution and crisis management with the proposed Financial Claims Compensation Scheme.

The IMF conducted the FSAP for Australia in 2006 and concluded that Australia "has a high overall level of compliance with the [Basel] Core Principles" (p. 27). The Detailed Assessment of banking supervision in Australia also concluded that Australia was compliant with 26 of the 30 Basel Core Principles (BCPs) for Effective Banking Supervision (considering that Principle 1 is divided into 6 subsections), largely compliant with 3, and materially non-compliant with 1. Some of the key recommendations of the FSAP to the APRA and banking supervision were to: (1) continue strong risk management practices, including through regular stress testing; (2) continue to develop a formal failure resolution and crisis management process; (3) enhance supervisory capacity in terms of resources; (4) continue improving cooperation in crisis management with New Zealand regulators within the Trans-Tasman Council on Banking Supervision; (5) and introduce amended legislation in the anti-money laundering/combating the financing of terrorism (AML/CFT) area. The 2007 IMF report observes progress in each of these areas. For example, Australia is moving towards a risk-sensitive framework of supervision with the adoption of Basel II framework (in January 2008), and the Australian government is considering a proposal to launch the Financial Claims Compensation Scheme that would ease the burdens of the depositors of a failed ADI. Also, the APRA received additional funding in the 2007/08 Budget to help retain highly skilled supervisory staff, and legislative changes were made to enhance coordination in crisis management under the aegis of the Trans-Tasman Council. Lastly, the Anti-Money Laundering and Counter-Terrorism Financing Act was passed in December 2006 with the potential of addressing many of the weaknesses pointed out in the FSAP.The 2008 Article IV report by the IMF mentions further progress. For instance, three of the country's four largest banks have been approved to adopt the internal ratings based approach, while the fourth is expected to adopt it by end-2008 under the Basel II framework that came into effect in January 2008. Further, the government is also instituting safeguards to ensure that the reduction in capital at banks is gradually phased in. As regards the Financial Claims Compensation Scheme, the government announced in June 2008 its intention to launch it so as to provide a failed ADI's depositors their first AUD20, 000. The introduced legislation also includes broader crisis management arrangements to enhance the regulators' ability to deal with ailing or failing ADIs. The 2007/2008 Budget, as the 2008 IMF report adds, also provided additional funding to the APRA to improve its staff capabilities over the next four years. In addition, APRA has been granted more flexibility and autonomy in its decision-making by the government's removal of the requirement that it receive ministerial consent before taking administrative actions.

The 2006 IMF FSAP finds the preconditions for effective banking supervision well established. Australia has implemented comprehensive structural reforms to strengthen its monetary and fiscal policies. The body of law and the judicial system are robust and respected. Accounting standards are aligned with international codes and the profession is of a high international standard. Resolution of distressed institutions is facilitated by a sound regime of corporate and bankruptcy laws. Australian financial system is relatively large and well diversified and dominated by ADIs. Banking supervision was observed to be "at the leading edge of current approaches to risk-focused supervision" (IMF 2006a, p. 27). Risk based supervision - underpinned by the tools, the internal risk rating system, the Probability and Impact Rating System (PAIRS) and the response system, the Supervisory Oversight and Response Systems (SOARS) - embodies international best practices. Prudential regulations and their implementation are also strong and of a very high standard. However, supervision by the APRA could be further streamlined and standardized to improve the overall supervisory quality.

The APRA is the prudential regulator and supervisor of the Australian financial services sector. Its supervision encompasses ADIs that consist of banks, credit unions, building societies, states the APRA website. The APRA was established in 1998 and is funded majorly by the taxes levied on the supervised entities. As of 2008, assets held by the APRA's supervised entities totaled USD 3 trillion representing 21 million Australian depositors. The APRA website declares that APRA's supervisory approach is "forward-looking, primarily risk-based, consultative, consistent and in line with international best practice." The 2006 IMF FSAP report further mentions that the Reserve Bank of Australia (RBA) is responsible for overall financial stability and payment system oversight. The Australian Transaction Reports and Analysis Centre (AUSTRAC) is the regulator for ensuring compliance with AML/CFT laws and regulations that are prepared by the Attorney-General's Department, and is also the country's Financial Intelligence Unit (FIU). The Treasury is responsible for preparing laws and regulations related to the banking and financial sector.

The RBA published its half-yearly "Financial Stability Review" in March 2008 wherein it reaffirms the optimistic outlook projected by the 2007 IMF report. It further states that the credit ratings of the large Australian banks remain high, their deposits have shown rapid growth, and their fund raising capacity in both domestic and international capital markets remain robust. Banks have low levels of risky portfolios when compared to their international counterparts and their already low non-performing loans have also declined. Despite relaxed lending criteria, banks did not let their credit standards fall and take relatively small open positions in financial market instruments vis-à-vis their balance sheet size. However, some indirect effect of the subprime mortgage crisis in the U.S. has been felt by Australian banks, notes the Financial Stability Review, in that their share prices have fallen significantly and their funding costs have risen considerably. The Financial Stability Review notes that the five largest banks of the Australian banking system recorded a profit of $27 billion in 2007 before taxes, and this amounted to an annual increase in profits of 10.5 percent. The profitability has its basis in "low levels of problem loans, strong balance sheet growth, and rising income from wealth management operations" (p. 23), notes the RBA. The ratio of banks' non-performing loans to total assets was 0.4 percent in December 2007, which is low both by historical and international standards. Further, Australian banks also showed a healthy total capital ratio of 10.2 percent in December 2007, with an aggregate Tier 1 capital ratio of 7.2 percent. Credit rating agencies also continue to have a favorable view of the Australian banking sector. Standard and Poor's, for example, upgraded the four largest banks to AA in early 2007 and kept them there through the market turmoil. Significantly, no Australian bank was downgraded by any rating agency during the tumultuous 2007.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The legal system is firmly in place for the banking sector as well for the supervisors and regulators involved. The Banking Act of 1959 provides the basis for banking regulation and confers specific powers, functions and responsibilities on the APRA; the 1998 Australian Prudential Regulation Authority Act established the APRA, and defines its responsibilities and objectives; the 1959 Reserve Bank Act regulates the Australian payment system; the 1988 Financial Transaction Reports Act stipulates reporting requirements for banks and other financial institutions; and the 2001 Australian Securities and Investment Commission Act grants powers to the Australian Securities and Investment Commission (ASIC) to monitor all corporations, including banks, registered under the former. The Australian Treasury and the Treasurer are responsible for framing the legislative framework governing the financial sector and are also involved in the administration of the 1998 Financial Sector (Shareholdings) Act and enforcement by the APRA. The Attorney-General's Department prepares laws and regulations relating to AML/CFT and also gives policy advice to the Minister of Justice and Customs. The Reserve Bank of Australia regulates the country's payments system and the AUSTRAC is Australia's anti-money laundering and financial intelligence unit .

1.(2) Operational independence and adequate resources.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA enjoys "legislated operational independence" (IMF 2006a, p. 27). Despite its independence, the APRA is accountable to the Australian government as well as the Parliament. The three-member executive group is appointed by the Governor-General in consultation with the Treasurer. The APRA's independence ensures specialized attention to prudential regulation and political neutrality in the discharge of its responsibilities. The IMF assessment did not find any evidence of government interference in the APRA's activities . As for its resources, the APRA is financed by levies imposed on the supervised financial entities. The government taxes these entities and allocates funds to the APRA as also to other financial supervisors to finance their operations. The government does not interfere in the use of these funds. The APRA has proven to be highly professional and its staff is instilled with personal integrity, the IMF comments . When the APRA is brought under the Financial Management and Accountability Act, it will be granted certain exemptions that will maintain its budgetary flexibility and operational priorities. The APRA also does not have civil service salary constraints that might come in the way of the APRA's ability to attract skilled staff for effective prudential oversight. However, one potential area of government interference, per the IMF assessment, is the Treasurer's power to issue policy directions to the APRA. However, the IMF concedes that this involves prerequisites that the APRA Executive Chairperson be consulted, and the direction published in the Gazette and tabled in the Parliament . Such prerequisites make the directions transparent and accountable, the Australian authorities contend. Further, the Treasurer had never given the APRA any directions under this power as of 2006. The 2008 Article IV report by the IMF mentions some enhancements in the APRA's operational autonomy. It notes that the APRA has been granted more flexibility and autonomy in its decision-making by the government's removal of the requirement that it receive ministerial consent before taking administrative actions. Further, the 2007/2008 Budget provided additional funding to the APRA to retain high quality staff and to improve its staff capabilities over the next four years.

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA is authorized under the 1959 Banking Act to grant and revoke banking licenses under circumstances spelled out by the Act. The APRA also makes prudential standards for ADIs and holding companies. These Standards can be made binding by the APRA through the issue of directions. The APRA has been empowered by various laws to obtain any information from banks that it deems important to fulfill its prudential regulatory responsibilities. The Banking Act allows the APRA to obtain information on a bank's financial stability and the Financial Sector (Collection of Data) Act enables it to determine reporting standards and requires banks to submit all required data and information to the APRA .

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA has wide authority under the 1959 Banking Act to direct banks in the interest of compliance with prudential standards or the protection of depositors. The APRA may also intervene when it finds a bank unable to repay its depositors, or meet its other obligations. Under the APRA's risk-based supervision, there is considerable room for qualitative judgment subject to internal procedures in the interest of consistency. The APRA's internal risk rating system for its supervised entities, PAIRS, incorporates these qualitative assessments. The APRA has extensive powers to compel banks to submit all required information and data. The Banking Act requires banks to notify the APRA immediately if it may not be able to meet its obligations, and makes it an offence to withhold information on any breach of prudential standards or any unsound practice or matter. The APRA also has wide-ranging powers, both legally and in practice, to deal with and correct unsafe or unsound banking practices .

1.(5) Legal protection for supervisors.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The assessment elaborates that "there is legal protection for individual supervisors while discharging their duties in good faith" (IMF 2006a, p. 28); however, no protection is granted for actions or omissions in bad faith. Though there is no specific law to cover the APRA or its supervisory staff against the legal costs for action brought against them, the APRA does protect its members as required, and for added measure, has insurance coverage against legal action for its directors and officers as well as the Deed of Indemnity granted by the APRA to its members. The IMF recommends the APRA to have written policies on such assistance to enhance transparency and ensure equality of treatment .

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

CP

Australia is largely compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA "has a mandate clearly defined in law, as well as legal provisions for coordination and information sharing with other agencies" (IMF 2006a, p. 28). The APRA has concluded memoranda of understanding (MoUs) with other financial regulators, the ASIC, the RBA, and the Treasury to promote effective cooperation and information sharing. Coordination among the four agencies is cemented by the Council of Financial Regulators, a coordinating body of which all four are members. Regular cooperation and information exchange also occur in practice. However, the assessment notes that AUSTRAC is not able to share information with APRA . The 2008 U.S. DoS report observes in this regard that the 2006 AML/CTF Act stipulates that regulators of the financial sector (including the APRA and AUSTRAC) coordinate to a greater extent than previously mandated. The 2006 IMF assessment further mentions that the Australian Prudential Regulation Authority Act empowers the APRA to release confidential information to other financial sector supervisory agencies, including foreign agencies, for the discharge of the latter's duties. The Act also exempts the APRA from being forced to disclose classified information under the 1982 Freedom of Information Act .

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

CP

Australia is largely compliant with this principle, per the 2006 Detailed Assessment by the IMF. The Banking Act defines the term "banking business" and requires entities wishing to carry out "banking business" to obtain authorization from the APRA unless they are exempted under the Act. The IMF takes strong exception to these exemptions, stating that financial companies can and do use such exemptions to operate as deposit-taking institutions for retail customers, leading to the hazard of unequal treatment of such institutions and misleading of depositors. The IMF, therefore, advises the APRA to review its exemption criteria and notes that the APRA is taking action in this regard to ensure that no significant deposit taking institution falls outside the scope of its prudential regulation .

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Further, "the APRA applies a comprehensive and well structured licensing procedure with the intent to identify and make the applicant address potential weaknesses before a license is granted" (IMF 2006b, p. 18).

4. Authority to review and reject transfer of ownership.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA has a well-developed process to review changes in ownership of significant shareholdings .

5. Authority to review major acquisitions and investments.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA has a well-developed process to review significant acquisitions and investments. It expects banks to consult with it early on about acquisitions and new business investments. The APRA assesses and approves such acquisitions and investments .

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The assessment further elaborates that "APRA applies, and should be commended for so doing, standards for capital requirements which constitute best international practices, including some which will be introduced for those countries implementing the coming Basel II framework (e.g., capital requirements on an individual and risk-based bank basis)" (IMF 2006b, p. 20). The APRA Prudential Standard (APS) 110 - Capital Adequacy provides the legal framework that sets the standard for assessing a bank's capital adequacy . The APRA, as well as the supervised banks, were also making good progress in preparing to implement Basel II, the IMF found. The 2008 annual report of the RBA confirms in this regard that the Basel II framework was introduced by the APRA on January 1, 2008 and a majority of banks preferred to adopt the standardized approach to calculate credit and operational risks rather than the internal ratings-based (IRB) or the advanced measurement (AMA) approach.The 2008 Article IV report by the IMF also mentions the progress made by Australia in implementing Basel II. For instance, three of the country's four largest banks have been approved to adopt the internal ratings based approach, while the fourth is expected to adopt it by end-2008 under the Basel II framework that came into effect in January 2008. Further, the government is also instituting safeguards to ensure that the reduction in capital at banks is gradually phased in.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. APS 220 lays down detailed and principle-based requirements for an effective credit risk management system of an ADI, and puts the responsibility on the shoulders of the board of directors and the management of the ADI. The APRA verifies the adequacy of the policies and their implementation during on-site prudential inspections .

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The assessment further explains that the APRA has issued prudential standards for loan evaluation and loan loss provisioning. The adequacy of such policies and their implementation at the supervised ADIs is reviewed by the APRA during on-site inspections as also through external audits .

9. Prudential limits and management information system on concentration of exposure.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Boards of Directors of the ADIs are obliged by the APS 221 to put and keep in place policies and procedures to identify and control concentration of exposure. Prudential limits for exposure in different areas are clearly defined, which may be crossed only in exceptional cases and only with the prior approval of APRA. Further, banks are required to submit to APRA in their quarterly reports their exposures exceeding 10 percent of their capital base, both on a solo and a consolidated basis .

10. Arm's length rule and monitoring for connected lending.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Further, "the objectives of the principle are met in practice through the detailed standards and onsite review of credit risk management (IMF 2006b, p. 24). The IMF, however, recommends that the definition of related parties in the APS 222 on Association with Related Entities include individuals such as officers and directors of banks, their subsidiaries and affiliates as well as their close associates .

11. Policies and procedures for country risk and transfer risk.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Though there are no specific prudential standards for country or transfer risk, APS 220 provides the overall credit risk management framework. Therefore, the IMF finds that the objective of the principle is met through the detailed specification addressing country and transfer risk within APS 220, and the compliance is reviewed through on-site examinations. However, the IMF feels it will be good to have a prudential standard promulgated specifically addressing country and transfer risk . The 2008 IMF report quotes a RBA argument that liquidity and currency risks are in control as foreign currency assets exceed foreign currency liabilities. Also, the economy can withstand external shocks due to its deep, open and transparent financial markets that are conducive to foreign investment. The IMF proposes that such a favorable climate can be sustained through the continued implementation of structural reforms and sound macroeconomic framework .

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. APRA has developed a highly skilled specialist team for market risk supervision. The supervisors conduct on-site examinations and off-site monitoring of ADIs to assess their risk management, information, and control systems. The boards of directors of the ADIs are made responsible for risk management policies and practices commensurate with the risks undertaken by the ADIs .

13. Comprehensive risk management processes.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The assessment elaborates that the APS 310 lays down risk management reporting requirements on the boards of the ADIs, under which they are required to identify the key risks confronting the banks, detail the systems they have put in place to monitor and manage these risks, attest to their effectiveness through timely and adequate reporting, and ensure that the above reporting is accurate and current. Further, the APRA reviews the adequacy of banks' risk management processes through on-site and off-site review . The 2007 APRA annual report also confirms its risk-based approach to supervision and states that the effectiveness of this approach is underpinned by skilled and experienced supervisory staff, strong research and statistical capabilities, and robust supervisory tools to assess emerging risks to the supervised institutions .

14. Adequate internal controls.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The prudential standards in place are adequate to meet the requirements of this principle, and the proposed APS 510, per the assessment, promises to further strengthen governance practices in Australian banks . The APRA website mentions in this regard that the revised APS 510 became effective July 1, 2008.

15. Strict "know-your-customer" rules and high ethical and professional standards.

ID

The 2006 Detailed Assessment by the IMF finds Australia "materially non-compliant" with this principle. The IMF however concedes that Australia has already started taking steps to rectify the shortcoming, with a new AML legislation in the offing, a plan to increase AUSTRAC resources, and the decision by the government to give the AUSTRAC "complete responsibility for verification of the adequacy of banks' management of the prudential risks arising from AML/CFT" (IMF 2006a, p. 28). The IMF notes that given this initiative and provided that the APRA is apprised of all necessary information and takes all necessary action to enforce compliance based on such information, Australia "will be able to move towards full compliance with this principle" (IMF 2006a, p. 29). The IMF based its assessment on the FATF's 2005 mutual evaluation report on Australia, which observed that the 1988 Financial Transaction Reports Act provided for customer due diligence obligations "do not meet current standards" (p. 1). The supervisor's measures to verify customer identification at financial institutions were found "inadequate" (p. 1) and implementation of the AML/CFT preventative and supervisory system ineffective. In response to the IMF assessment, the Australian government declares its commitment to move closer to international standards with respect to this principle and notes that the AML legislation (then due in 2006) and related reforms in the works, when implemented, "will bring Australia into compliance with the FATF [Financial Action Task Force] recommendations" (IMF 2006a, p. 31).

The 2008 U.S. DoS report also attests that Australia is reforming and "significantly reshaping Australia's AML/CTF regime and bringing it into line with current international best practices" to fulfill its commitment spelled out to the FATF and the IMF. The promised Anti-Money Laundering and Counter-Terrorism Financing Act was passed in 2006 and later amended in 2007 and it forms the legislative part of the ongoing reforms. The Act imposes a number of obligations on financial sector institutions, including customer due diligence, reporting obligations, record keeping obligations, and the requirement to establish and maintain an AML/CFT program. The Act introduces risk-based supervision and its obligations will be gradually implemented through December 2008. The AUSTRAC has been conferred with the responsibility of framing AML/CFT rules that detail the operational aspects of the implementation of the Act in consultation with industry. The AUSTRAC has already issued 16 AML/CFT Rules as well as guidance notes for institutions in 2006-2007. The AML/CTF Act aims at gradually and completely replacing the Financial Transaction Reports Act, which will remain operational until all aspects of the new Act are implemented. The new Act will broaden suspicious transaction reporting obligations, and also require reporting of international funds transfers, and transactions valued at more than AU$10,000. The reporting entities will also be obliged to submit compliance reports detailing their compliance with their AML/CTF Law.

Australia is taking further steps to enhance AML/CFT compliance by the regulated entities, notes the U.S. DoS report. The Minister of Home Affairs introduced three tools in December 2007 to foster AML/CFT compliance. They include "AUSTRAC Online [which] is a secure Internet-based system which assists entities adhere to their reporting and regulatory obligations, and enables them to access their own information; the AUSTRAC Regulatory Guide [which] is an instructional and 'living' document that assists industry to understand and meet their AML/CTF obligations, which will be updated as further AML/CTF Act provisions are implemented; [and] lastly, the AUSTRAC Typologies and Case Studies Report 2007 [which] was published to raise industry awareness regarding potential AML/CTF risk factors, methods and typologies." The AUSTRAC has also been bestowed with additional powers to ensure compliance, including the power to require on-site external compliance audits and regular compliance reports from entities. The AUSTRAC can also initiate monitoring orders, make statutory demands for information and documents, and seek civil penalty orders, remedial directives and injunctions. The AML/CTF Act also stipulates that regulators of the financial sector coordinate to a greater extent than previously mandated. Overall, the U.S. DoS report confirms that Australia is making considerable efforts to meet the revised FATF 40+9 requirements.

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Australia's supervisory function "embodies many best international practices" (IMF 2006a, p. 29). Also, its on-site and off-site supervision achieves a "generally high level of implementation" (IMF 2006a, p. 29). However, the assessment notes that the APRA has a high turnover of staff that might impact the quality and consistency of supervision. Also, the PAIRS/SOARS system is not being fine-tuned on a continuous basis. The APRA is, therefore, advised to make its supervisory approach more standardized . The Australian authorities respond by stating that it is working on improving its recruitment, staff retention and workplace practices to attract and retain skilled staff in a highly competitive labor market .

17. Regular contact with bank management and understanding of bank's operations.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA meets with bank management, boards of directors, and senior executives regularly and extensively, and especially if a matter of concern is identified during an on-site inspection visit .

18. Analytical reports and statistical returns on solo and consolidated basis.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Reporting requirements are set out in the Banking Act and the Financial Sector (Collection of Data) Act. ADIs are obliged to file both solo and consolidated reports on a quarterly and annual basis. The Board of directors and senior management are made liable for prudential reporting and may face criminal sanctions for failure to comply with requirements of the Financial Sector (Collection of Data) Act. The APRA uses solo and consolidated reports for comprehensive peer group analysis and industry wide comparative analysis .

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA's Supervisory Framework provides for a robust risk based program of on-site examinations. Further assistance is provided by its risk-rating tools, the PAIRS and the SOARS. The supervisory staff consists of both frontline supervisors as well as technical specialists that focus on operational or market risks, and their objectives and goals are clearly spelled out. The APRA also makes use of external auditors for targeted reviews of the reliability of submitted data. The APRA conducts regular tripartite meetings involving the external auditors, the banks, and itself. The APRA meets with the boards of directors of banks only when an on-site review exposes a serious matter of concern .

20. Ability to supervise on a consolidated basis.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA conducts consolidated supervision on solo, group and conglomerate bases. The IMF, however, notes that the noteworthy supervision suffers due to high turnover of supervisory staff at the APRA . The APRA annual report of 2007 explains that it is committed to continue adopting an outcome oriented supervisory approach. In accordance with this approach, the APRA adopts a principles-based approach to recognize the diversity among institutions, and a risk-based approach to supervise individual institutions of a conglomerate so as to focus supervisory attention and resources to those posing the greatest risks to the system .

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The country adopted the International Financial Reporting Standards (IFRSs) in 2005, and "the accounting profession is widely recognized as meeting a high international standard" (IMF 2006a, p. 27).

22. Adequate supervisory measures to ensure timely corrective action.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. The APRA's ability to take timely and proportionate remedial actions is bolstered by its continuous off-site monitoring and risk based program of on-site examinations. Further assistance is provided by its risk-rating tools, PAIRS and SOARS, and the APRA Supervision Framework. The APRA's powers to take corrective action are wide-ranging, and include imposing sanctions on non-compliant institutions or those engaged in unsafe banking practices. Among its powers include the ability to make its inspections more frequent and intense, ask a bank to increase its capital ratio or discontinue certain lines of business, require banks to report more frequently on the area causing concern, revoke the license of the bank in question, and participate in the merger or acquisition of the troubled bank, provided such action does not adversely impact the healthier institution. The IMF assessment notes that the APRA's decisions for remedial actions were in the process of being reconsidered.The 2008 Article IV report by the IMF mentions in this regard that the government announced in June 2008 its intention to launch the Scheme so as to provide a failed ADI's depositors their first AUD20, 000. The introduced legislation also includes broader crisis management arrangements to enhance the regulators' ability to deal with ailing or failing ADIs.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Further, "all operations of locally incorporated banks and their subsidiaries, whether they are in Australia or overseas, are subject to the global consolidated banking supervision undertaken by APRA" (p. 37). The APRA's "conglomerates policy" monitors compliance on a group basis and strengthens the scope of APRA's supervision .

24. International exchange of information with other supervisors.

FC

Australia is fully compliant with this principle, per the 2006 Detailed Assessment by the IMF. Under the APS 222, the APRA's prior approval is required before a bank establishes or acquires a regulated entity abroad, and under the Banking Act, the APRA can prohibit a bank from doing so if it is deemed too risky by APRA. APRA conducts on-site inspections of the overseas operations of Australian banks, and during the visits, it meets with host supervisors to discuss the overall operations of the bank, informs them regarding any matter of concern, exchanges prudential assessments and reports of bank groups with them, and liaises closely with them in the event of taking action against the overseas operation .

The IMF further observes that APRA has concluded MoUs with several host supervisors of Australian banks, such as those of New Zealand, the UK, Hong Kong, Germany, China, and the U.S.A. These MoUs aim "to facilitate cooperation and exchange of information" (IMF 2006a, p. 29), which include investigative assistance, and assistance in obtaining information from third party sources . The 2007 annual report of APRA adds that the Trans-Tasman Council of Banking Supervision that was established in 2005 as an agency to foster cooperation between the financial supervisors of Australia and New Zealand got a shot in the arm with the passage of legislation in both countries to facilitate better cooperation and harmonization between the two supervisors .

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

CP

Australia is largely compliant with this principle, per the 2006 Detailed Assessment by the IMF. Further, "Australia has a sound regime for home and host country supervision, including memoranda of understanding with many foreign supervisory authorities" (IMF 2006b, p. 39). Foreign deposit-taking entities wishing to carry out banking business must obtain authorization from the APRA unless they are exempted under the Act. The IMF takes strong exception to these exemptions, stating that foreign financial companies can and do use such exemptions to operate as deposit-taking institutions for retail customers, leading to regulatory arbitrage and possible threat to the security of depositors' investments. Also, these exemptions come in the way of global consolidated supervision by eliminating host country supervision of exempt institutions. The IMF, therefore, advises the APRA to review its exemption criteria and notes that the APRA is taking action in this regard to ensure that no significant deposit taking institution falls outside the scope of its prudential regulation .