On 5 December 2023, the Australian Prudential Regulation Authority (APRA) released the quarterly statistics for Authorised Deposit-taking Institution (ADI) for September 2023, revealing robustness and resilience within the sector.

Notably, the average total capital ratio of the Australian banking sector ranged from 17.7 per cent to 23.7 per cent, underscoring its strength.

Drawing on insights from these statistics, discussions within the sector and recently concluded triennial Internal Capital Adequacy Assessment Process (ICAAP) reviews, we have observed a marked improvement in capital management maturity within the mutual sector.

This improvement is evident in heightened governance involvement from those charged with governance (TCWG) and more thorough consideration of severe yet plausible stress scenarios encompassing critical risks such as mortgage price declines, climate impacts, and cyber threats.

Despite advancements in capital management maturity, ADIs must maintain a vigilant focus on balancing risk and growth in their capital planning endeavours. To support a more mature ICAAP framework, the following key considerations have been identified:

  1. Data quality as an asset: Recognising ICAAP as a forward-looking forecasting process reliant on historical data and forward-looking assumptions and financial models, ADIs must treat quality data as a critical asset. To ensure that the results of the ICAAP remain relevant, leveraging requirements of CPS 235 – Managing Data Risks, will be important.
  2. Increased focus on operational risk: Operational risk poses a significant challenge in capital management modelling. With new regulations such as CPS 230 - Operational Risk Management, ADIs can enhance its capability to collect operational risk data and develop operational risk estimates to support its capital management plans.
  3. Automation and technology: While traditional tools like Excel spreadsheets suffice for stress testing and scenario analysis, ADIs stand to gain from leveraging automated capital management tools. Such tools enable more granular scenario analysis, including the evaluation of multiple scenarios, enhancing the effectiveness and efficiency of capital planning processes.

ICAAP plays an important role in an ADI’s strategic planning and decision-making process. It provides a comprehensive assessment of the capital required to support each of the relevant risks and the capital available to support potential growth initiatives.

ADIs need to focus on becoming more mature in its ICAAP to achieve balance between risk and growth. Organisations concerned about whether a compliant and appropriate ICAAP is in place or those seeking further insights on optimising financial strategies, are encouraged to reach out for tailored guidance to ensure compliance and enhance strategic outcomes.

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