Financial Sector (Collection of Data) (reporting standard) determination No. 3 of 2017

Reporting Standard ARS 731.3A International Banking Statistics – Immediate and Ultimate Risk Exposures – Domestic Entity

I, Katrina Ellis, delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (the Act) and subsection 33(3) of the Acts Interpretation Act 1901:

(a) REVOKE Financial Sector (Collection of Data) (reporting standard) determination No. 28 of 2008, including Reporting standard ARS 231.3A International Exposures: Consolidated (Domestic Entity) made under that Determination; and

 (b) DETERMINE Reporting Standard ARS 731.3A International Banking Statistics - Immediate and Ultimate Risk Exposures – Domestic Entity (‘the reporting standard’), in the form set out in the Schedule, which applies to the financial sector entities to the extent provided in paragraph 3 of the reporting standard.

Under section 15 of the Act, I DECLARE that the reporting standard shall begin to apply to those financial sector entities, and the revoked reporting standard shall cease to apply, on 1 October 2017.

This instrument commences on 1 October 2017.

Dated: 08 August 2017

[Signed]

Katrina Ellis

General Manager

Data Analytics

Interpretation

In this Determination

APRA means the Australian Prudential Regulation Authority.

financial sector entity has the same meaning given by section 5 of the Act.

Schedule  

Reporting Standard ARS 731.3A International Banking Statistics - Immediate and Ultimate Risk Exposures – Domestic Entity comprises the 27 pages commencing on the following page.

Reporting Standard ARS 731.3A

International Banking Statistics – Immediate and Ultimate Risk Exposures – Domestic Entity

Authority

1. This Reporting Standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001.

Purpose

2.             Information collected by this Reporting Standard is used by APRA for the purposes of satisfying Australia’s obligations in providing aggregate international banking statistics to the Bank for International Settlements, and may be used by APRA for prudential regulation purposes. It may also be used by the Reserve Bank of Australia.

Application and commencement

3.             This reporting standard applies to an authorised deposit-taking institution (ADI) as set out in the table below.

4.             This Reporting Standard applies for reporting periods ending on or after 31 December 2017.

Information required

5.             An ADI, to which this Reporting Standard applies, must provide APRA with the information required as set out in paragraph 6 in respect of each reporting period.

6.             If an ADI, to which this Reporting Standard applies, is part of a Level 2 group, the ADI must provide APRA with the information required by ARF 731.3A at Level 2, in respect of each reporting period unless the ADI is a subsidiary of an authorised NOHC. If the ADI is a subsidiary of an authorised NOHC, the ADI’s immediate parent NOHC must provide APRA with the information required by ARF 731.3A in respect of each reporting period. In doing so, the immediate parent NOHC must comply with this Reporting Standard as if it were the relevant ADI. Otherwise an ADI, to which this Reporting Standard applies, must provide APRA with the information required by ARF 731.3A at Level 1.

Forms and method of submission

7.             The information required by this Reporting Standard must be given to APRA in electronic format using the ‘Direct to APRA’ application or by a method notified by APRA, in writing, prior to submission.

Note: the ‘Direct to APRA’ application software (also known as ‘D2A’) may be obtained from APRA.

Reporting periods and due dates

8.             Subject to paragraph 10, an ADI to which this Reporting Standard applies must provide the information required by this Reporting Standard in respect of each quarter ending 30 September, 31 December, 31 March and 30 June.

9.             The information required by this Reporting Standard must be provided to APRA within 28 calendar days after the end of the reporting period to which the information relates.

10.         APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular ADI, to require it to provide the information required by this Reporting Standard more frequently, or less frequently, having regard to:

(a)          the particular circumstances of the ADI;

(b)          the extent to which the information is required for the purposes of the prudential supervision of the ADI; and

(c)          the requirements of the Bank for International Settlements or the Reserve Bank of Australia.

11.         APRA may grant an ADI an extension of a due date, in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.

Note: for the avoidance of doubt, if the due date for a particular reporting period falls on a day other than a usual business day, an ADI is nonetheless required to submit the information required no later than the due date.

Quality control

12.         The information provided by an ADI under this Reporting Standard must be the product of processes and controls that have been reviewed and tested by the external auditor of the ADI. Guidance Statement GS 012 Prudential Reporting Requirements for Auditors of Authorised Deposit-taking Institutions, issued by the Auditing and Assurance Standards Board, provides guidance on the scope and nature of the review and testing required from external auditors. This review and testing must be done on an annual basis or more frequently if necessary to enable the external auditor to form an opinion on the accuracy and reliability of the information.

13.         All information provided by an ADI under this Reporting Standard must be subject to processes and controls developed by the ADI for the internal review and authorisation of that information. These systems, processes and controls are to assure the completeness and reliability of the information provided.

Authorisation

14.         When an ADI submits information under this Reporting Standard using the D2A software or, other method as notified by APRA in writing, it will be necessary for an officer of the ADI to digitally sign, authorise and encrypt the relevant information. For this purpose, APRA’s certificate authority will issue ‘digital certificates’, for use with the software, to officers of the ADI who have authority from the ADI to transmit the information to APRA.

Minor alterations to forms and instructions

15.         APRA may make minor variations to:

(a)          a form that is part of this Reporting Standard, and the instructions to such a form, to correct technical, programming or logical errors, inconsistencies or anomalies; or

(b)          the instructions to a form, to clarify their application to the form

without changing any substantive requirement in the form or instructions.

16.         If APRA makes such a variation it must notify in writing each ADI that is required to report under this reporting standard.

Transitional

17.         An ADI must report under the old reporting standard in respect of a transitional reporting period. For these purposes:

old reporting standard means the reporting standard revoked in the determination making this reporting standard (being the reporting standard which this reporting standard replaces).

transitional reporting period means a reporting period under the old reporting standard:

(a)          which ended before the date of revocation of the old reporting standard; and

(b)          in relation to which the ADI was required, under the old reporting standard, to report by a date on or after the date of revocation of the old reporting standard.

Note: for the avoidance of doubt, if an ADI was required to report under an old reporting standard, and the reporting documents were due before the date of revocation of the old reporting standard, the ADI is still required to provide the overdue reporting documents in accordance with the old reporting standard.

Interpretation

18.         In this reporting standard:

ADI means an authorised deposit-taking institution within the meaning of the Banking Act 1959.

APRA means the Australian Prudential Regulation Authority established under the Australian Prudential Regulation Authority Act 1998.

Australian-owned bank means a locally incorporated ADI that assumes or uses the word ‘bank’ in relation to its banking business and is not a foreign subsidiary bank.

authorised NOHC has the meaning given in the Banking Act 1959.

branch of a foreign bank means a ‘foreign ADI’ as defined in section 5 of the Banking Act 1959.

building society means a locally incorporated ADI that assumes or uses the expression ‘building society’ in relation to its banking business.

class of ADI means each of the following:

(i)                  Australian-owned bank;

(ii)               foreign subsidiary bank;

(iii)             branch of a foreign bank;

(iv)              building society;

(v)                credit union; and

(vi)              other ADI.

credit union means a locally incorporated ADI that assumes or uses the expression ‘credit union’ in relation to its banking business.

due date means the last day of the 28 calendar days provided for in paragraph 9 or, if applicable, paragraph 11.

foreign subsidiary bank means a locally incorporated ADI in which a bank that is not locally incorporated has a stake of more than 15 per cent.

immediate parent NOHC means an authorised NOHC, or a subsidiary of an authorised NOHC, that is an immediate parent NOHC within the meaning of Prudential Standard APS 001 Definitions (APS 001).

Level 1 has the meaning in APS 001.

Level 2 has the meaning in APS 001.

locally incorporated means incorporated in Australia or in a State or Territory of Australia, by or under a Commonwealth, State or territory law.

other ADI means an ADI that is not an Australian-owned bank, a branch of a foreign bank, a building society, a credit union or a foreign subsidiary bank.

reporting period means a quarter of a year as provided for in paragraph 8 or, if applicable, paragraph 10.

subsidiary has the meaning in the Corporations Act 2001.

19.         In this Reporting Standard, unless the contrary intention appears, a reference to an Act, Regulations or Prudential Standard is a reference to the Act, Regulations or Prudential Standard as in force from time to time.

20.         Where this Reporting Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing.

Reporting Form ARF 731.3A

International Banking Statistics — Immediate and Ultimate Risk Exposures — Domestic Entity

Instructions

These instructions assist in the completion of Reporting Form ARF 731.3A International Banking Statistics- Immediate and Ultimate Risk Exposures - Domestic Entity (ARF 731.3A) and is based on the Bank for International Settlements (BIS) Guidelines for reporting the BIS international banking statistics (BIS Guide). Reporting entities are encouraged to consult the BIS Guide for a detailed discussion of the rationale for, and uses of, the international banking statistics:

http://www.bis.org/statistics/bankstatsguide.htm

ARF 731.3A has two purposes:

• to provide information on the international exposures of Australian-owned banks; and

• to satisfy Australia’s obligation to the BIS in providing aggregate international banking statistics for Australia. These are available, along with statistics from other countries, on the BIS website (http://www.bis.org/statistics/index.htm).

ARF 731.3A is part of the international exposures forms. The four forms (listed below) make up the suite of international exposures forms.

• Reporting Form ARF 731.1 International Banking Statistics - Locational Data (ARF 731.1) collects data on claims and liabilities broken down by currency, counterparty sector, and counterparty country on a domestic books basis.

• ARF 731.3A collects data on claims broken down by counterparty country, maturity and counterparty sector on the greater of a Level 1 or Level 2 basis.

• Reporting Form ARF 731.3B International Banking Statistics - Immediate and Ultimate Risk Exposures – Foreign Entity (ARF 731.3B) collects data on claims broken down by counterparty country, maturity and counterparty sector on a domestic book basis.

• Reporting Form ARF 731.4 International Banking Statistics - Balance Sheet Items (ARF 731.4) collects a small number of balance sheet items for Australian-owned banks on the greater of Level 1 or Level 2 basis.

Australian-owned banks complete ARF 731.1, ARF 731.3A and ARF 731.4.

Foreign subsidiary banks and branches of foreign banks complete ARF 731.1 and ARF 731.3B.

Reporting level

ARF 731.3A is to be completed by all Australian-owned banks. Data are to be reported on a Level 2 consolidated basis (or Level 1 where there is no Level 2 entity).

Australian-owned banks should report consolidated data on the cross-border claims of their offices worldwide, and the claims of their foreign affiliates on residents of the countries where the affiliates are located. Australian-owned banks should also report positions vis-á-vis residents of Australia i.e. total domestic claims.

Reporting entities should also include claims in all currencies including AUD vis-à-vis residents of Australia.

Securitisation deconsolidation principle

Except as otherwise specified in these instructions, the following applies:

1. Where an ADI (or a member of its Level 2 consolidated group) participates in a securitisation that meets APRA’s operational requirements for regulatory capital relief under Prudential Standard APS 120 Securitisation (APS 120):

(a)          special purpose vehicles (SPVs) holding securitised assets may be treated as non-consolidated independent third parties for regulatory reporting purposes, irrespective of whether the SPVs (or their assets) are consolidated for accounting purposes; and

(b)          the assets and liabilities of the relevant SPVs may be excluded from the bank’s reported amounts in ARF 731.3A.

2.             Where an ADI (or a member of its Level 2 consolidated group) participates in a securitisation that does not meet APRA's operational requirements for regulatory capital relief under APS 120, or the ADI elects to treat the securitised assets as on-balance sheet assets under Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk or Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, such exposures are to be reported as on-balance sheet assets in ARF 731.3A.

Reporting basis and unit of measurement

ARF 731.3A should be completed as at the last day of the stated quarter (i.e. March, June, September and December). Australian-owned banks should submit the completed return to APRA within 28 calendar days after the end of the reporting quarter.

Australian-owned banks are to complete the return in AUD millions to three (3) decimal places (with the data formatted to the nearest million).

Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates (AASB 121).

Report all items on ARF 731.3A in accordance with Australian Accounting Standards unless otherwise specified.

Valuation

Assets and liabilities should be measured in accordance with Australian accounting standards.

Note: International financial claims should be reported gross of specific provisions and the General Reserve for Credit Losses as defined by Prudential Standard APS 220 Credit Quality. Provisions and reserves are not to be included in ARF 731.1, ARF 731.3A or ARF 731.3B.

When reporting the data, reporting entities should also ensure that all figures be prepared in accordance with applicable Australian accounting principles.

As a general rule, it is recommended that financial claims belonging to the banking book be valued at face values or cost prices and financial claims belonging to the trading book be valued at market or fair values which is largely consistent with AASB 139 Financial Instruments: Recognition and Measurement.

Financial claims resulting from derivative contracts should be valued at fair values (i.e. current credit exposure calculated as the sum of all positive fair values of derivative contracts outstanding after taking account of legally enforceable bilateral netting agreements) as this ensures consistency not only with the BIS OTC derivatives statistics but also with the valuation principles for all other on- and off-balance sheet items in the BIS international financial statistics. Negative fair values of derivative contracts are considered to represent financial liabilities and are therefore by definition excluded from the reporting of financial claims.

Contingent liabilities resulting from guarantees and credit commitments should be valued at face values or the maximum possible exposure.

Standard Business Reporting (SBR)

The accounting type (i.e. credit or debit) is stated for all monetary items and represents the natural accounting type of the item collected.

Background to the international exposures forms

There are two main sets of international banking data: the locational and consolidated banking statistics.

The locational statistics (collected on ARF 731.1) collect data on the domestic book international financial claims (assets) and liabilities of resident banks.

The consolidated statistics (collected on ARF 731.3A, ARF 731.3B and ARF 731.4) collect data on the international on-balance sheet (and selected off-balance sheet) financial claims (i.e. contractual lending) of banks vis-à-vis the rest of the world and provides a measure of the risk exposure of lenders’ national banking systems. The data mainly cover contractual lending by the head office and all its branches and subsidiaries on a global consolidated basis, net of inter-office accounts. These statistics also provide information on the maturity (i.e. liquidity) and sector risk distribution of reporting entities’ contractual lending.

As reporting entities’ country risk exposures can differ substantially from that of contractual lending, information on claims on an ultimate risk basis is also collected. Claims on an ultimate risk factor in risk transfers such as guarantees and collateral.

The key difference between the two sets of BIS banking data is based upon the concept of residency. Locational statistics show the claims and liabilities of banks located in Australia vis-à-vis entities located in other countries, including inter-office positions, and domestic entities.

The consolidated data show the total claims of a reporting entity group’s global offices, including the claims of their domestic and foreign affiliates. Claims between offices of the same entity group are netted out.

The differences between locational and consolidated are highlighted in an example in Figure 1. ABC Bank (headquartered in Sydney) has lent $10 million to a non-financial corporation located in France routed via its branch office in London.

Figure 1: Flow of funds and BIS locational and consolidated banking data

 $10m $10m

The implications of this transaction for the BIS data are as follows:

Locational statistics:

Australian resident bank (i.e. ABC Bank Sydney) will report to APRA a $10 million increase in locational claims on UK resident banks (ABC Bank London).

The UK resident bank will report to the UK regulator a $10 million increase in locational claims on a non-financial corporation resident in France.

Consolidated statistics:

Australian resident reporting entities (i.e. ABC Bank, Sydney) will report a $10 million increase in consolidated claims on a non-bank financial corporation resident in France.

Specific instructions

Terms highlighted in bold italics indicate that the definition is provided in these instructions.

1. Claims on an immediate borrower basis: by remaining maturity and country: cross-border claims and foreign currency claims

SBR: submit item 1 and item 2 with accounting type of debit (assets).

2. Claims on an immediate borrower basis: by sector of borrower and counterparty country: cross-border claims and foreign currency claims

3. Claims and liabilities on an immediate borrower basis: by sector of borrower and counterparty country: local positions in local currencies

SBR: submit item 3.1 – 3.9 with accounting type of debit (assets), submit item 3.10 with accounting type of credit (liability).

4. Risk transfers

SBR: submit item 4 column 1 with accounting type of credit (negative asset), submit item 4 column 2 with accounting type of debit (assets).

5. Claims on an ultimate risk basis

SBR: submit item 5 with accounting type of debit (assets).

6. Derivative contracts, guarantees and credit commitments

SBR: submit item 6 with accounting type of debit (assets)

Definitions

Banking institutions refers to financial institutions whose business it is to receive deposits or close substitutes for deposits and to grant credits or invest in securities on their own account, including credit unions and building societies. Money market funds, investment funds and pension funds are excluded from this category. For the purposes of ARF 731.3A, exclude central banks and international organisations (including multilateral development banks). These should be classified as central banks.

Central banks refers to central banks, including the RBA, BIS, the European Central Bank, and other official monetary authorities. A complete list of central banks is maintained on the BIS website at http://www.bis.org/statistics/bankstatsguide.htm

Claims refers to:

1. Australian offices’ local claims on Australian residents. For example, any local claim of the Sydney office of an Australian-owned bank on a borrower resident in Australia;

2.      Australian offices’ cross-border claims on non-residents. For example, any claim of the Sydney office of an Australian-owned bank on a borrower resident in New Zealand;

3.      Foreign offices of Australian-owned banks’ local claims on non-residents. For example, any claim of the  New Zealand branch of an Australian-owned bank on a borrower resident in New Zealand; and

4.      Foreign offices of Australian-owned banks’ cross-border claims on non-residents - for example, any claim of the New Zealand branch of an Australian-owned bank on a borrower resident in the United States.)

The data on financial claims should comprise all those balance sheet items, which represent claims on residents in other individual countries or economies. As in the locational statistics, the principal items are deposits and balances placed with banks, loans and advances to banks and non-banks, holdings of securities (including credit linked notes and other collateral debt obligations and asset-backed securities) and participations. If derivatives are booked as on-balance sheet items, they should not be reported as part of the item ‘On-balance sheet financial claims’, but separately under the derivative contracts item.

Consolidated statistics – See section Background to the international exposures forms.

Counterparty country refers to where the counterparty of the financial instrument is domiciled.

Countries are as per ISO 3166, available at http://www.iso.org/iso/country_codes

Counterparty sector refers to the economic sector of the counterparty of the financial instrument. There are six counterparty sectors to be reported:

• Banking institutions;
• Central banks;
• General government;
• Non-banking financial institutions;
• Non-financial corporations;
• Households and non-profit institutions serving households (NPISHs); and
• Unallocated sector.

Credit commitments represent arrangements that irrevocably obligate an institution, at a client’s request, to extend credit in the form of loans, participation in loans, lease financing receivables, mortgages, overdrafts, other loan substitutes, commitments to extend credit in the form of the purchase of loans, securities or other assets, such as back-up facilities including those under note issuance facilities and revolving underwriting facilities.

Cross-border claims refers to claims of an Australian office on non-residents, and offshore offices on counterparties which are not residents of the host country (for example, the claims of a New Zealand domiciled subsidiary on both Australian residents and residents of any other country).

Derivative contracts includes all derivatives instruments with a positive fair value, independent of whether the derivative contracts are booked as off- or on-balance sheet items. The data should be reported on a level 2 consolidated and ultimate risk basis i.e. inter-office positions should be netted out and the positions should be allocated to the country where the final risk lies.

However, credit derivatives, such as credit default swaps and total return swaps, should only be reported under the derivative contracts item if they belong to the trading book of a protection buying reporting entity. Credit derivatives which belong to the banking book should be reported as risk transfers by the protection buyer and, all credit derivatives should be reported as guarantees by the protection seller.

Financial claims resulting from derivative contracts should be valued at fair values (i.e. current credit exposure calculated as the sum of all positive fair values of derivative contracts outstanding after taking account of legally enforceable bilateral netting agreements) as this ensures consistency not only with the BIS OTC derivatives statistics but also with the valuation principles for all other on- and off-balance sheet items in the BIS international financial statistics. Negative fair values of derivative contracts are considered to represent financial liabilities and are therefore by definition excluded from the reporting of claims.

Note: This definition of derivative contracts differs to that used in ARF 731.1.

Foreign currency refers to claims or liabilities not in the local currency of the office they are booked. That is, claims of an Australian office not in AUD, and claims of offshore offices not in the currency of the host country (for example, claims of a New Zealand domiciled subsidiary that are denominated in AUD or USD).

General government refers to federal, state and local government and social security funds both in Australia and overseas (the general government sector), and non-profit institutions financed by general government. Exclude public non-bank financial institutions and public non-financial corporations. These should be classified as non-bank financial institutions or non-financial corporations, respectively. Exclude central banks and international organisations (including multilateral development banks). These should be classified as central banks.

Guarantees represent contingent liabilities arising from an irrevocable obligation to pay to a third party beneficiary when a client fails to perform some contractual obligations. They include secured, bid and performance bonds, warranties and indemnities, confirmed documentary credits, irrevocable and stand-by letters of credits, acceptances and endorsements. Guarantees also include the contingent liabilities of the protection seller of credit derivative contracts.

Guarantees should be reported to the extent that they represent the unutilised portions of both binding contractual obligations and any other irrevocable commitments. Performance bonds and other forms of guarantee should only be reported if, in the event of the contingency occurring, the resulting claim would have an impact on total cross-border claims and local claims in any currency.

Immediate borrower claims refers to all on-balance sheet financial claims of the Level 2 consolidated group, excluding derivative contracts and lending of securities, gold and other precious metals without cash collateral.

Inwards risk transfer is a risk transfer that reallocates the claim into the country being reported. Examples of risk transfers are shown in the attachment.

Local claims refers to claims of an Australian office on Australian residents, and claims of offshore offices on residents of the host country (for example, the claims on New Zealand residents of a New Zealand domiciled subsidiary).

Local currency refers to claims or liabilities of an Australian office in AUD, and claims of offshore offices in the currency of the host country (for example, of a New Zealand domiciled subsidiary denominated in NZD).

Local liabilities refers to the liabilities of an Australian office on Australian residents, and liabilities of offshore offices on residents of the host country (for example, the liabilities on New Zealand residents of a New Zealand domiciled subsidiary).

Locational statistics – See section Background to the international exposures forms.

Maturity refers to the residual maturity of on-balance claims.

• Claims are to be entered according to their remaining maturity.

• Deposits  that  are  repayable  on  demand  should  be  allocated  to  the  shortest maturity bracket.

• Overdue items should be allocated to the shortest maturity bracket (i.e. ‘< 3 months’).

• Claims that cannot be classified by maturity, such as equity and participations, should be assigned to a residual category ‘unallocated’.

• Remaining  maturities  should  be  defined  on  the  basis  of  the  time  to  final payment of the relevant claim.

• The maturity classification of revolving credit facilities should be based on the term to loan rollover, which would typically be in the ‘< 3 months’ maturity bracket.

• Overdrafts should be allocated to the shortest maturity bracket (i.e. ‘< 3 months’).

Net transfer of risk is the net of outwards risk transfer and inwards risk transfer for a given country.

Non-banking financial institutions refers to private or public financial institutions which are not banking institutions, and are engaged primarily in the provision of financial services and activities auxiliary to financial intermediation, such as fund management. Include special purpose vehicles, hedge funds, securities brokers, money market funds, pension funds, insurance companies, financial leasing corporations, central clearing counterparties, unit trusts, other financial auxiliaries and other captive financial institutions. Also include any public financial institutions such as development banks and export credit agencies.

Non-financial corporations refers to both public and private non-financial corporations and unincorporated enterprise, such as partnerships and branches of foreign corporations.

Non-residents are any entity whose centre of predominant economic interest is outside Australia’s economic territory.

Include:

• households whose principal place of residence is overseas; and
• foreign branches and foreign subsidiaries of Australian enterprises, for example, a foreign branch of an Australian bank.

Exclude:

• Australian-based branches and subsidiaries of foreign enterprises, for example, Australian branches of foreign banks.

Outwards risk transfer is a risk transfer that reallocates the claim from the country being reported. Examples of risk transfers are shown in the attachment.

Residents of Australia are any entity whose centre of predominant economic interest is within Australia’s economic territory.

Include:

• households whose principal place of residence is in Australia; and
• Australian branches and Australian subsidiaries of foreign enterprises, for example, Australian branches of foreign banks.

Exclude:

• foreign branches and foreign subsidiaries of Australian enterprises, for example, foreign branches of Australian banks.

Risk transfers refers to where claims that have been reallocated from the country of the immediate borrower to the country of ultimate risk as a result of guarantees, collateral, and credit derivatives which are part of the banking book. This includes risk-transfers between different economic sectors in the same country.

The information on the reallocation of claims should be reported as net risk transfers, i.e. the difference of reallocated claims that increase the exposure (inward risk transfers) and those, which reduce the exposure (outward risk transfers) vis-à-vis a given country. All outward and inward risk transfers should add up to the same total.

The risk reallocation should also cover loans to domestic borrowers that are guaranteed by foreign entities that therefore represent inward risk transfers and increase the exposure to the country of the guarantor. Equally foreign lending that is guaranteed by Australian entities (e.g. a domestic export credit agency such as the Export Finance and Insurance Corporation) should be reported as an outward risk transfer, which reduces the exposure to the country of the foreign borrower.

In summary, there are four potential forms of risk reallocation:

1. Lending to a non-resident that is guaranteed by a non-resident third party.

In this case both the outward risk transfer from the original borrower and the risk transfer to the guarantor have to be reported.

ii.             Lending to a non-resident that is guaranteed by an Australian resident third party.

In  this  case  both  the  outward  risk  transfer  from  the  original  non-resident borrower has to be reported as well as the inward risk transfer to Australia.

iii.           Lending to a resident that is guaranteed by a non-resident third party.

In this case, report the outward risk transfer from Australia as well as the inward risk transfer to the non-resident guarantor.

iv.           Lending to a non-resident where the exposure is extinguished by receiving a cash collateral.

In  this  case  only  the  outward  risk  transfer  from  the  original  non-resident borrower has to be reported (but no inward risk transfer to Australia).

Examples of risk transfers are shown in the attachment.

Ultimate risk claims refers to claims allocated to the country where the final risk lies. That is, the country in which the guarantor of a financial claim resides and/or the country in which the head office of a legally dependent branch is located. Collateral may be considered as an indicator of where the final risk lies to the extent that is recognised as a risk mitigant under the Basel Committee on Banking Supervision’s capital framework.

Similarly, if credit derivatives are used to cover the counterparty risk of financial claims in the banking book, the country of ultimate risk of these positions is defined as the country in which the counterparty to the credit derivative contract resides.

In case of holdings of credit linked notes, collateral debt obligations and asset-backed securities a ‘look-through’ approach should be adopted. The country of ultimate risk is defined as the country where the debtor of the underlying credit, security or derivative contract resides.

It is recognised that this ‘look-through’ approach might not always be possible for practical reasons. Accordingly, reporting entities might only be able to provide estimates for the allocation of claims to the country where the debtor of the underlying risk resides or to allocate the claims to the country of the immediate borrower that is the country where the issuer of the securities resides.

The issuer (or protection buyer) of credit linked notes, collateral debt obligations and asset backed securities should regard the issuance of a security backed by financial claims, and sale to investors, as a cash collateral which extinguishes the exposure of the issuer to the underlying claim.

Claims on separately capitalised subsidiaries can only be considered as being guaranteed by the head office if the parent has provided an explicit guarantee. In contrast, any claims on non-incorporated branches should for the purposes of the consolidated statistics always be considered as guaranteed by the respective head office, even if there is no legal guarantee.

Unallocated sector refers to where the counterparty sector is unknown.

Attachment: Examples of reporting of risk transfers

Example 1

An Australian resident has granted a loan of AUD 10 million to a manufacturer in Hong Kong, which is guaranteed by a bank in Japan. The Australian resident bank should report the claim as an outward risk transfer from Hong Kong and an inward risk transfer to Japan. In ARF 731.3A, this example will look as follows:

Example 2

If in example 1, an Australian resident bank guarantees the claim instead, the claim should be reported as an outward risk transfer from Hong Kong and an inward risk transfer to Australia.

Example 3

If in example 1, the manufacturer were resident in Australia, the claim would have to be reported as an outward risk transfer from Australia and an inward risk transfer to Japan.

Example 4

If in example 1, the manufacturer were resident in Japan, the claim would have to be reported as an outward risk transfer from the non-financial corporations in Japan and an inward risk transfer to the banking institutions sector in Japan.

As a result, the data in item 5.1 column 2 Claims on an ultimate risk basis should be $10 million higher than the amount in item 2 column 8 Claims on an immediate risk basis by sector. Item 5 column 8 Claims on an ultimate risk basis worksheet should be $10 million lower than the amount in item 2 column 8 for Japan.

Example 5

If in example 4, the loan were granted by a subsidiary of an Australian-owned bank in Hong Kong, the claim would have to be reported as an outward risk transfer from Hong Kong and an inward risk transfer to Japan (remembering that the loan is guaranteed by a bank in Japan).

As a result, the data in item 5 columns 2 and 7 Claims on an ultimate risk  basis for Japan will be $10 million higher than in item 2 columns 2 or 9 Claims on an immediate risk basis by sector, depending on whether the claim was denominated in Hong Kong dollars or any other currency. In addition, the data in item 5 columns 6 and 9 Claims on an ultimate risk basis for Hong Kong would be $10 million lower than in item 2 columns 6 or 9 Claims on an immediate risk basis by sector.

Example 6

An Australian resident bank makes an AUD 10 million loan to the Wellington branch of a US bank.  The loan should be reported as a claim against New Zealand in items 1 and 2 (Claims on an immediate borrower basis), as an outward risk transfer from New Zealand, and as an inward risk transfer to USA.

Example 7

An AUD 10 million claim on the Wellington branch of another Australian-incorporated bank should be included against New Zealand in items 1 and 2 (Claims on an immediate borrower basis) and as an inward risk transfer for Australia.

Example 8

A claim in AUD or any other currency on the Sydney office of a US bank (or on an Australian company with a US guarantor), is included in in items 1 and 2 (Claims on an immediate borrower basis). An outward risk transfer in respect of such a claim should be reported against Australia and an inward risk transfer to USA.