A. Introduction

1. This Chapter of the BPG sets out the standards, guidance and norms required to fulfil the regulatory requirements in respect of managing the Group Risk associated with Banks forming part of Financial Groups. These standards, guidance and norms supplement the regulatory requirements set out in the Rules in Chapter 10 of BBR. These elements convey the supervisory expectations of the AFSA regarding Group Risk and its management by a Bank. The AFSA will use these standards, norms and key elements specified here to assess compliance with BBR Rules on Group Risk.

2. Chapter 10 of BBR includes Rule requirements for a Bank:

(a) to implement an effective management framework for Group Risk exposure; and

(b) to ensure capital adequacy at the level of the Financial Group.

3. Chapter 10 of BBR also includes requirements limiting Financial Group exposures and restrictions on the ownership or control of Banks.

4. Group Risk refers to the risk of potential losses incurred by an Authorised Firm on account of its relationship with other members of its Financial Group, if it were to be part of one. Group membership may be a source of both strength and weakness to an Authorised Firm. The purpose of Group Risk requirements is to ensure that an Authorised Firm takes proper account of the risks related to the Authorised Firm’s membership of a Group. The Group Risk requirements form a key part of the AFSA’s overall approach to prudential supervision.

B. Financial Group - Requirements

5. For the purposes of BBR Rule 10.1, the AFSA would consider a range of factors when requiring an Authorised Firm to form a Financial Group. These factors would include regulatory risk factors, including but not limited to, (direct and indirect) participation, influence or contractual obligations, interconnectedness, intra group exposures, intra group services, regulatory status and legal framework.

6. If more than one member of the same Group is subject to an obligation to provide information in respect of a position of the Group or Financial Group, one or more of those Authorised Firms may make application to the AFSA for an appropriate waiver or modification.

7. For the purposes of BBR Rule 10.2 (1), an Authorised Firm may take into account its position within its Group. For instance, it would be reasonable for a small Authorised Firm within a larger Group to place some reliance on its parent to ensure that appropriate systems and controls are in place.

C. Financial Group Capital Requirements

8. This section of the BPG sets out the standards, guidance, and best practices required to fulfil the regulatory requirements in respect of the Group Risk capital requirement, specified in BBR Rule

10.3. The AFSA will use these standards, guidance and key elements to assess compliance with BBR Rules on Group risk capital requirements.

9. If an Authorised Firm breaches BBR Rules 10.3 (3) and& 10.3 (4), the AFSA will take into account the full circumstances of the case, including any remedial steps taken by another regulator or the Authorised Firm, in determining what enforcement action, if any, it will take.

10. Capital resources or adjusted capital resources would not be freely transferable if they are subject to an obligation to maintain minimum capital requirements to meet domestic solvency requirements, or to comply with debt covenants. In general, Capital Resources or Adjusted Capital Resources are considered not to be freely transferable if they are subject to a legal or constructive limitation on their transferability, whether that transfer would be made by dividend, return of capital or other form of distribution. Examples of relevant limitations might include obligations to maintain minimum Capital Requirements to meet domestic solvency requirements, or to comply with debt covenants.

11. The following examples are provided to illustrate the application of BBR Rule 10.4.

(a) The concentration risk limit which requires that the total of a banking business firm’s net exposures to a counterparty or connected counterparties must not exceed 25% of its regulatory capital) applies to the firm’s Financial Group, so that the group’s net exposures to a counterparty or connected counterparties must not exceed 25% of the Financial Group’s regulatory capital, calculated using the Rules in Chapter 10 of BBR.

(b) Similarly, the limit in BBR Rules in Chapter 4, which require that the total of all of the firm’s net large exposures must not exceed 800% of its regulatory capital) applies to the firm’s Financial Group, so that the group’s total net large exposures to counterparties or connected counterparties must not exceed 800% of the Financial Group’s regulatory capital, calculated using the Rules in chapter 10 of BBR.

12. Because the Financial Group Capital Requirement set out in BBR Rule 10.3 (6) includes Capital Requirements in respect of Group entities, Capital Resources may be included in the calculation of Financial Group Capital Resources to the extent of those requirements. Capital that is surplus to those requirements is, however, subject to an additional condition before it may be taken into account for the purposes of Financial Group capital adequacy.