Incident Command System - Case Study Example

Running Header: Incident Command System Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY FRAMEWORK. Australian prudential regulatory authority is institution, whose role is to ensure that the financial institutions are safe and stable this is done for the purpose of ensuring that, the interest of depositors, policyholders for example reserve bank of Australia and fund members are met. The key role of the Australian prudential regulatory authority in ensuring that, the above objective is met is licensing and supervision of the financial institutions in order to ascertain that there are adequate and quality financial institutions. Also it ensures that the financial institutions operate within the stipulated framework set by its policyholders. To carry above roles Australian prudential regulatory authority derives powers from the Australian legislation which includes Financial Sector (Collection of Data) Act 2001 and banking act 1959. Australian prudential regulatory authority develops financial institution operational framework from International regulatory framework for example Basel supervisory committee and locally formulated policies, with the reason of making its financial institutions relevant globally and thus maintaining the creditability countries financial institutions and stability of the economy. APRA has continuously reviewed its framework by keeping it up to date, on the changes made by the Basel committee to maintain and enable the banking system to adopt to the changes in the market, therefore, minimizing risk which increases confidentiality to the depositors and fund members in the country’s financial institutions. Basel framework has evolved from Basel I which focused only on a single risk that is credit risk to Basel II which focus on both market and credit risk and the latest Basel III which was implemented by Australian prudential regulatory authority to minimize effects of Global financial crisis. APRA Large exposure framework (APS 221 - 1). APRA regulates the exposure limit set by the risk management team of financial institution. The framework requires any deposit-taking financial institution: To have management strategy that safeguards the counterparties on concentration of risk to minimize risk exposure one is likely to experience. Leaves the responsibility of the policy formulation and monitoring compliance to the board of directors and also the board have to continually review and update the policies to enhance its relevance. To set exposure limit to avoid exposing risk to the counterparty to extend that the institution cannot compensate. In addition, the institution should show how the above limit is arrived at to ascertain on its accuracy. In case the limit is exceeded APRA requires the institutions should seek approval from the boards committee. It requires the management to carry out stress testing and scenario analysis, this ensures that the institution monitor on the events that might greatly impact on the financial institution so as to service the event e.g. event affecting capital can be serviced by increasing the capital base or reducing capital base depending on the challenges facing the institution. APRA requires the financial institution to recognize large exposure risk as: Any exposure that is equal or greater than 10% of the institutions capital base. The exposure to counterparty should show relationship or link between the institution and counter party. Total claims by the counterparty which includes balance sheet items and off-balance sheet items but excludes items that have been written off, items that are secured by cash deposit and also those that are secured against government risk free securities. APRA supervise the financial institution to ensure that they adhere to the above requirement for the benefit of the stakeholder and countries economy since failure to regulate exposure limit may cause the collapse of countries financial system core driver of economic stability. APRA liquidity risk framework (Basel III). APRA incorporated Basel III due to the reforms made by the committee in response to the need that the banking sector had problems in managing their liquidity even, when they have adequate capital and in this connection APRA adopted Basel III to ensure proper functioning of the banking sector and the financial markets. Financial institutions according to Basel III are required to take into consideration liquidity coverage ratio (LCR) and Net stable funding ratio (NSFR) in managing its risk. Liquidity coverage ratio. This standard helps financial institutions like banks to survive a 30 calendar day of liquidity stress using the fund invested in high-quality liquid asset that can be liquidated to meet the requirements of the bank in that 30 days stress after which it is assumed that within that period things will be normal due to corrective mechanism are but in place to normalize the condition of the banking sector. The liquidity coverage ratio is determined by two variables: Amount of stock of high-quality liquid assets and the total cash outflow projected for the period of 30 days. That is, ×100% This helps to in ensuring that in any given time the outflow requirement is not greater than the available liquid assets. When outflow is greater than inflow banks is required not to hold any asset as a liquid in the liquid stock for a period of 30 days from the day of realization of the deficit until it accumulate required high quality liquid asset. APRA ensures that the financial institution recognizes high quality liquid asset as per the Basel III framework to avoid wrong conclusion on the liquid coverage ratio which might cause collapse of financial institution within 30 day period of financial stress, Basel III state that high quality item should, have few related characteristics with risky assets in the market, traded on stable and recognized exchange market for example international exchange market, be lowly concentrated in the market that is the market should be diverse securities traded in order to reduce number of the same kind, be an asset, which is actively repurchased in the exchange market, be constantly quoted in the stock market thus reliable and can be sold when needed. Net stable funding ratio. The purpose of Net stable funding ratio is to ensure that, long term asset are funded with stable level of risk, thus the liquidity risk minimization initiative is brought about by the fact that any careless choice of a unpredictable risky liability to fund a long-term assets can cause collapse of any financial institution, Basel III on net stable funding ratio enables the financial institutions to study the characteristics of the sources of funds for example, available stable funding comprises of preferred stock which has fixed charges and failure to meet the obligation can cause auctioning of the security used thus interfering with the liquidity of the financial institutions, it also include any long-term liability for example loan that need to be repaid within a period of more than one year. Merges and takeover policies. APRA framework prohibits merges of large financial institutions or acquisition of foreing banks. This constrain ensures that few financial institutions doesn’t dominate the financial market thus impairing the competition which results to a drop in the standards of financial sector of the country economy. Importance of APRA framework. It controls the entry of the financial institution into the financial market- Australian prudential regulatory authority is required to license financial institutions entering the market and its key mandate is to ensure that institution that join financial market meet the required requirement for example minimum capital requirement set by the policyholders and reserve bank of Australia. This in return enable such institutions from collapsing in periods of financial crisis thus provide confidence to the depositors and fund members resulting to economic stability. It create a favorable environment for competition in financial market- Australian prudential regulatory authority restrict merger of major and acquisition of foreign financial institution this is to minimize instance by which an institution may obtain more powers than others in the market such powers will create monopoly leading to collapse of medium and small sized institution. Monopoly leads to lack of competition therefore compromising on the quality of the service provided in the market. Australian prudential regulatory authority reduces impact of offshore risk to the financial market and country’s economy- Australian prudential regulatory authority has incorporated internationally recognized policies in their structure for example Basel supervisory committee policies and keep on updating in order to cope up with the changing trend in the global financial market. Maintains depositors and fund members confidence in the financial market- Australian prudential regulatory authority requires every financial institution to have FDC account in which the depositor can get compensated incase the bank collapses, depositor will get compensated, and it is a requirement for each bank to deposit a proportion of its total deposit to the Reserve Bank of Australia. APRA ensures that every institution adheres to this rule therefore, maintaining confidence to depositors thus pooling funds for investors and as a results promote growth in the economy. Australian prudential regulatory authority widens and deepens the financial markets- this is achieved through APRA effort in adopting internationally recognized policies for example Basel I, Basel II and Basel III. This is in terms of diverse securities traded and also the geographical size of the market, through adoption of such policies, financial institutions can compete with internationally and also have guidelines on how to diversify their financial products with minimal risk for example introduction of a number of derivatives into financial market. Australian prudential regulatory authority also enables the financial institution manages their risk- APRA provides financial institutions with guidelines to measure and avoid risk for example the use of PAIRS and SOARS risk on event analysis. It also provides policies to monitor liquidity for example liquid coverage ratio and Net stable earnings ratio to enable financial institutions avoid liquidity risk. RESERVE BANK OF AUSTRALIA STRATEGIES ON GLOBAL FINANCIAL CRISIS. Australia had great exposure on the global financial crisis because its financial market dealt with international market on in large volumes and it was internationally recognized on the fund management sector, traded asset securities, hedge fund sector and it also had few domestic financial institutions. Further, few large financial institution traded in foreign market in large proportion (65%) than in domestic market where it constitutes 40-50%. This shows that exposure to the Australia financial market was great but due to strong policies in financial sector, global financial crisis was not great unlike other sectors and financial institutions of other countries which a number of its institutions collapsed during 2008 Global financial crisis. STRATEGIES. Reserve bank brought in restriction to financial institutions to avoid further instability- They banned short term selling of securities in Australia securities exchange and financial stock with aim of reducing the further risk since short term financial funds are more risky compared to long term finance. Reserve Bank brought in policies to restore and boost confidence of the depositors, it included guarantee cover on deposits and debt for example it guaranteed 100% cover on the deposit of less than one million dollars and it was to end the waiver after three years. This encouraged the surplus economic units to keep on saving for deficit financial unit to access funds for invest thus maintain the growth of the economy. Reserve Bank also brought in fiscal policies and interest rate cut to reduce impact of Global financial crisis. Interest rate cut was aimed at reducing the leverage level of the private sector in order to concentrate on enhancing growth of the private sector so that it can boost economy of the country. For fiscal policy the government borrowed domestically and used it in infrastructure thus improving circulation of the currency in the economy. It restored liquidity, unfreezing the financial markets and diversified the range of securities provided in the market as collaterals for example resident mortgage backed securities were re-introduced. This was aimed at stimulating financial market by increasing the number transaction and also reduced the impact of the crisis since diversification reduced contagion risk that might affect only one line of securities. CONCLUSION. Though Australia financial sector faced great exposure to the Global financial crisis, it had strong financial policies and sound institutions such as APRA, which monitored, correct and update such policies to remain relevant by coping with the ever changing trend in the financial market. It also adjusted to financial crisis by formulating and implementing policies that shielded the financial institutions from collapsing. Through the joint effort of all the stakeholders, Australia financial sector was recognized to have experienced least impact of Global financial Crisis of 2008. REFERENCE. Brown, C and K. Davis. (2008). The Sub-Prime Crisis Down Under. Journal of Applied Finance 16-28. Basel committee on banking supervision.(June 2004). International Convergence of Measure and Capital Standard. Retrieved October 31, 2013, from http://www.bis.org/publ/bcbs118.pdf Australian Prudential Regulatory Authority. ( January 2008). Prudential Standard APS 221. Large Exposures. Retrieved October 31, 2013, from http://www.apra.gov.au/adi/PrudentialFramework/Documents/APS_221_January_2013.pdf Davis, K. (2009). Infrastructure Trust Financial Management. JASSA: The Finsia Journal of Applied Finance. 43-47. Basel committee on banking supervision. (December 2010). Basel III: International Framework for Liquidity Risk Measurement, Standard and Monitoring. Retrieved October 31, 2013, from http://www.bis.org/publ/bcbs238.pdf Gruen, D. (2009). Reflections on the Global Financial Crisis. Retrieved June 12, 2013, from http://www.treasury.gov.au/documents/1574/PDF/05_Reflections_on_the_Global_Financial_Crisis.pdf Kearns, J. (2009). The Australian Money Market in a Global Crisis. Reserve Bank of Australia Bulletin. 15-25. Retrieved June 12, 2013, from http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-2.pdf Stevens, G. (2009). Australia and Canada – Comparing Notes on Recent Experience. Reserve Bank of Australia Bulletin. 36-44. Retrieved June 12, 2013, from http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-4.pdf D’Aloisio, T (2009). Regulatory issues arising from the financial crisis for ASIC and for market participants. Retrieved October 31, 2013, from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/sdia-speech-chairman-May-09.pdf/$file/sdia-speech-chairman-May-09.pdf D’Aloisio, T (2009). Regulatory issues arising from the financial crisis for ASIC and for market participants. Retrieved October 31, 2013, from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/sdia-speech-chairman-May-09.pdf/$file/sdia-speech-chairman-May-09.pdf Read More