Question

Discuss briefly APRA’s PAIRS and SOARS techniques of the prudential regulation framework in Australia.

Answer 1

APRA The Australian Prudential Regulation Authority (APRA)

PAIRS Probability and Impact Rating System

SOARS Supervisory Oversight and Response System

NOW LET US UNDERSTAND ALL OF THESE IN DETAIL

APRA is an independent statutory authority that supervises institutions across banking, insurance and superannuation, and is accountable to the Australian Parliament.To support supervisors APRA has a set of systems, tools and processes that monitor industry trends and potential industry risks.

Industry Risk Management Framework-APRA has an Industry Risk Management Framework, the general purpose of which is to assist APRA in identifying and acting on significant emerging industry-wide risks

Industry Analysis tea- The Industry Analysis team, embedded within APRA’s supervisory divisions, has as one of its primary responsibilities the task of conducting analysis

Industry groups -The industry group is the key forum for addressing, and seeking APRA-wide consensus on, emerging industry issues.

DECISION MAKING PROCESS AND POLICY TOOLS

The main tools for macroprudential supervision in Australia are only exercisable by APRA. APRA is the only agency which has power to act to directly change the behaviour (and if necessary, the balance sheets) of entities to achieve macroprudential outcomes

In effect the PAIRS and SOARS model plays a role as an automatic stabiliser for the financial system (see Box B). APRA can also change prudential standards to dampen risk in the system.

Inter-agency consultation and coordination,Prudential tools and prudential policy,Suasion and directions powers,Engagement with Board,

PAIRS-SOARS framework

adopts a measured and risk-based approach to supervision, focusing supervisory attention on those areas of an entity or industry which pose the greatest risk. The PAIRS and SOARS framework helps to ensure that an appropriate supervisory response is taken, commensurate with the nature and degree of risk.APRA’s prudential supervision framework, which includes PAIRS, SAPs and quarterly risk reviews, supports a supervisory response appropriate to the nature, scale and complexity of regulated entities.APRA adjusts its prudential settings in response to assessed changes in systemic risk. APRA is generally recognised as taking a conservative approach to risk-weightings and capital definitions. Some of the decisions APRA has taken which result in this more conservative treatment have been in response to the build-up of risk in particular sectors. For example, in response to its stress testing of the housing loan portfolios of ADIs in 2003, APRA made some significant adjustments to the risk-weighting of housing loans as well as adjustments to the capital regime for lenders mortgage insurers (LMIs)

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