Application for a Banking Authority Foreign Bank Branches Prudential Statement J2

Application for a Banking Authority Foreign Bank Branches Prudential Statement J2 PS J2 Introduction 1. A foreign bank wishing to operate as a branch in Australia must obtain a banking authority issued pursuant to the Banking Act 1959. Authority to carry on banking business in Australia is granted by the Australian Prudential Regulation Authority (APRA). 2. A banking authority may be granted subject to conditions, and these may be varied, revoked, or added to at any time APRA by notice in writing. Banking authorities are granted subject to general conditions that a bank consult with APRA regarding prudential supervisory arrangements, and conform with any prudential arrangements laid down by APRA. A foreign bank branch is also subject to a condition restricting its acceptance of retail deposits (refer Paragraph 7). 3. The important role played by the banking system in the Australian economy and the consequent need to maintain the stability of the banking system requires that an applicant for a banking authority to operate as a branch in Australia is able to meet the high prudential standards set by APRA. 4. The prime responsibility for the oversight of a foreign bank branch s operations rests with the management of the bank (both locally and in its head office) and its home supervisor. Foreign bank branches are not subject to the depositor protection provisions of the Banking Act (Part II, Division 2). Nevertheless, foreign banks operating as branches in Australia must also submit their local operations to the prudential supervision of APRA and provide such information as APRA may require in connection with its prudential responsibilities. 5. There are no restrictions on the number of foreign banks operating as branches in Australia or on the size of their operations. Foreign banks may also establish locally incorporated banking subsidiaries in Australia (refer Prudential Statement J1 Locally Incorporated Banks ). Branch operations in Australia 6. As part of its decision in February 1992 to permit foreign banks to establish branch operations in Australia, the Government determined that because of the difficulties in ensuring the same degree of protection for depositors with branches as for those with locally incorporated banks, branches would be required to confine their deposit-taking activities to wholesale markets. Retail deposit-taking by foreign banks is required to be undertaken through locally incorporated banking subsidiaries. J2-1

7. Specifically, a branch of a foreign bank: is permitted to accept deposits and other funds in any amount from: - incorporated entities; - non-residents; and - employees of the bank; but is not permitted to accept initial deposits (and other funds) from other sources (individuals and non-corporate institutions) which are of less than $250,000. 8. The above restriction on raising of funds by a foreign bank branch is established by conditions placed on the banking authority of branches. No other specific restrictions are applied to the sources of funding by branches or to the use of funds by branches in Australia. 9. Foreign bank branches are not required to maintain endowed capital in Australia and are not subject to any capital-based large exposure limits. These are the responsibility of the home supervisor. APRA, however, as part of its prudential oversight, monitors the credit risk concentration borne by a branch (along with other risk exposures) and may raise any concerns with the branch, the bank s head office and with its home supervisor. 10. Foreign bank branches have access to the payments system in accordance with terms and conditions formulated for banks generally by the Australian Payments Clearing Association. Branches may offer cheque accounts to customers, subject to requirements set out above governing the nature and size of deposits they can accept. Disclosure requirements by branches 11. Pursuant to Section 11E of the Banking Act, a foreign bank branch is required to disclose to potential depositors that deposits in the branch are not subject to the protection of depositor provisions of the Act (Part II, Division 2). The following guidelines establish the basis upon which disclosure should be conducted: prior to the opening of an account, the transfer of an account from an existing entity, or the lodgement of an initial deposit, a foreign bank should provide a written statement to the prospective depositor which indicates that deposits are not covered by Division 2 of the Banking Act and, as such, are not subject to depositor protection provisions of the Banking Act; a foreign bank should obtain a signed acknowledgement from prospective depositors that they understand the status of deposits with the bank; for joint accounts, the acknowledgement should contain the signature of all interested parties; in the case of the transfer of an account from a locally incorporated J2-2

subsidiary bank to a branch, the depositor must formally consent to the transfer and consequent loss of protected status before the account is transferred; a foreign bank should have systems and procedures in place which ensure that depositors opening an account or making an initial lodgement of funds receive and acknowledge the disclosure statement; deposit slips or any other communication evidencing the creation of a deposit used by a foreign bank should carry the statement Deposits are not subject to Division 2 of the Banking Act Protection of Depositors. This statement should also appear on any certificates of deposit or other marketable securities issued by the foreign bank in the Australian market. Such instruments should generally be issued with a minimum denomination of $250 000 or other procedures should be in place to ensure any ineligible customers do not acquire the paper; and a foreign bank must acknowledge at the time of authorisation that it will conform with the above disclosure requirements. 12. A foreign bank s external auditors will be asked to report to APRA on the branch s compliance with the disclosure requirements as part of their work in relation to the branch s observance of prudential standards. Requirements for a banking authority 13. Applicants are expected to make a worthwhile contribution to banking services in Australia, and not merely add to the number of banks. Applicants should indicate the contribution which they would make to competition in Australia and the economic benefits their presence would bring to the Australian community. While applicants are not required to offer a full range of banking services, they are expected to maintain a significant presence in Australia and add some depth to the local banking market. Applicants wishing to specialise in any specific area of banking need to indicate their relevant expertise in that area. 14. Foreign banks applying for a banking authority to operate as a branch in Australia will need to meet the following minimum criteria: be incorporated and recognised as a bank under the laws of their home country; be of substance and high standing; have received consent from their home supervisor for the establishment of a branch in Australia; satisfy APRA that they are subject to adequate standards of prudential supervision in their home country (including as to capital adequacy) and that they are supervised on a consolidated basis consistent with the provisions of the Basle Concordat; J2-3

adhere to all prudential requirements set down by APRA; demonstrate a spread of shareholdings which is generally consistent with the objectives of the Financial Sector (Shareholdings) Act in respect of locally incorporated banks; demonstrate experience and competence in handling the range and scale of banking activities contemplated. This includes the appointment of senior management to the proposed branch with appropriate expertise and proven record of integrity; maintain from the commencement of operations appropriate management systems to monitor and limit risk exposures in relation to their local operations, and which ensure that the bank s head office is kept fully informed of the conduct of the proposed branch s operations; satisfy APRA that it is capable of producing all required statutory and prudential information in an accurate and timely fashion from the commencement of its banking operations; satisfy APRA as to the appropriateness and soundness of the proposed operational arrangements for the branch; have in place arrangements with an external auditor to report to APRA on the observance of prudential standards, upon the reliability of information supplied to APRA and any other matters agreed between the bank, the external auditor and APRA; comply, as appropriate, with the Reserve Bank s foreign exchange dealing arrangements; conduct settlement accounts at the Reserve Bank; and submit to APRA an acceptable business plan, incorporating projections of the scope, scale and specialisation of operations and cash flows and earnings for the proposed branch s first three years of operations. 15. An applicant must provide a written commitment to adhere to APRA s prudential requirements and an undertaking to provide APRA with any information which APRA may require for its prudential supervision of the proposed branch. An applicant should also acknowledge that APRA may discuss the conduct of the branch with the head office of the bank and its home supervisor(s). 16. A foreign bank wishing to operate as a branch is required to submit: a description of supervisory arrangements to which it is subject in its country of origin; a statement from its home country supervisor that the foreign bank is of good financial standing; and a statement from the home supervisor consenting to the establishment of a branch operation in Australia. Its home supervisor should also confirm that the foreign bank is supervised on a consolidated basis in accordance with the principles contained in the Basle Concordat and that the supervisor agrees to J2-4

co-operate (in terms of the Concordat) in the supervision of the branch. Branch and banking subsidiaries 17. Where a foreign bank receives authorisation for both a branch and a locally incorporated banking subsidiary, each of those banks is required to conduct its business in Australia in a way which recognises, and makes clear to others, its separate legal status and banking authorisation. 18. The branch and the banking subsidiary will need to have: separate books of account; separate statistical (including prudential) reporting to APRA; separate internal control systems for monitoring and managing risks, including systems for controlling credit risk, liquidity risk and market risk; as part of control systems, separate systems of delegations (although these could comprise the same people in some cases); and separate chief executive officers responsible for the proper management and prudent operation of the branch and subsidiary respectively. (One or other of these chief executives would normally be designated as being responsible for the overall operation of the foreign bank in Australia; this would facilitate discussions with APRA on issues straddling the separate authorisations.) 19. Banking transactions between a subsidiary bank and a branch would normally be expected to be at arm s-length. Given the potential in some situations for transactions to be at other than arm s-length, a banking subsidiary would normally be expected to refrain from purchasing assets from a branch of its parent. A limit is placed on the exposure (both direct and indirect) of a banking subsidiary to its parent bank (including its Australian branch). This is required to limit the extent to which capital can be passed back to the parent. 20. A branch and banking subsidiary of the same bank are permitted to share the same premises. In addition, joint functional support services, such as personnel and financial control between the two authorised entities are permitted, as are joint treasury operations. Branch and non-banking subsidiaries 21. All non-banking subsidiaries of a foreign bank authorised to conduct banking business in Australia, which engage in deposit-taking in Australia, must be subsidiaries of a locally incorporated bank. 22. Unless there are strong reasons to the contrary, the bulk of intermediation business conducted must be carried out in the branch (and any associated banking subsidiary), rather than any non-bank subsidiary. APRA recognises, however, that this requirement, combined with the taxation arrangements for foreign bank branches operating in Australia, has the J2-5

potential to limit the attractiveness of branch status in Australia. Against this background, and in order to engender more competition in banking, APRA accepts access to Section 128F (of the Tax Act) funding from overseas as an adequate reason for intermediation business to be undertaken within a non-bank subsidiary. Such borrowings, and any associated domestic lending, are not required to be carried out within the branch. All fund raising in the domestic market, however, is required to be conducted within the branch itself. 23. Non-bank subsidiaries are permitted to share premises, joint support services and treasury operations with their bank parents. It must be clear to all parties at all times the identity and status of the entity with whom they are dealing. 24. APRA expects the head of a branch (where the foreign bank does not have a locally incorporated banking subsidiary) to be in a position to keep it apprised of developments in any non-bank subsidiaries operating in Australia. (Where a foreign bank has both a branch and banking subsidiary either the head of the branch or the chief executive of the subsidiary should be designated to carry out this function.) Submission of an application for a banking authority 25. Applications for a banking authority should be submitted to APRA. 26. Three copies of the application (and any supporting material) should be provided. Applications should address all items listed in the accompanying Annex. 27. Prospective applicants are strongly encouraged to contact APRA at an early stage to discuss their interest in obtaining a banking authority. This enables APRA to identify any matters which might adversely impact on the proposal and to advise on the format and content of an application. 28. A banking authority may be granted to take effect on delivery or to take effect from some nominated date. J2-6

ANNEX Application for a Banking Authority Foreign Bank Branches Prudential Statement J2 Annex PS J2 The following information should be provided by a foreign bank applicant for a banking authority to operate as a branch in Australia: 1. Ownership and Management name of applicant; a brief history of the bank and an outline of its operations, names of substantial shareholders (direct and ultimate) and their respective shareholdings, directors (including principal business associations) and senior management; information necessary to demonstrate the applicant s financial standing. This should include balance sheet, profit and loss and off-balance sheet data for the bank itself, and where applicable for its holding company, for the last three years (plus any available current year data) and information on impaired loans and Basle risk based capital ratios; outline of organisational framework, including names and descriptions of the responsibilities of senior management of the branch, along with their qualifications and curriculums vitae; outline of reporting lines from the branch to head office and curriculum vitae for the personnel involved. 2. Structure of Business outline of proposed activities and scale of operations including details of any specialised services proposed and of any relevant expertise; outline of the potential contribution to competition in Australia and the economic benefits to be brought to the Australian community by the proposed branch; an indication as to whether the foreign bank intends to establish (or maintain) a locally incorporated banking subsidiary (and/or any non-banking subsidiaries) in Australia and the strategy under which these entities would operate, including details of any proposals to transfer assets or to share support services; details of borrowing and lending activities to be undertaken; details of proposed off-balance sheet activities; location of principal Australian office and an outline of Australian Annex J2-1

Annex PS J2 representation envisaged and the time frame over which representation will be established; estimate of total staff complement envisaged; and proposed date for commencement of operations. 3. Prudential Management an undertaking that the branch will adhere to the prudential requirements of APRA and will consult with and be guided by APRA on prudential matters and in respect of new business initiatives. This undertaking should include a commitment to provide APRA with any information which it may require for its prudential supervision of the branch; an acknowledgement that APRA may discuss the conduct of the branch with its head office and with the bank s home supervisor (s); details of the management systems and procedures the branch proposes to adopt to control and monitor risks, including: - credit policies (including policies in relation to exposures to individual clients and groups of related clients); - policy on monitoring asset quality and providing for doubtful debts; - liquidity management, including funding, maturity mismatching; - procedures for controlling risk, particularly market risk, in trading activities, including derivatives; - control of operational risk; and - arrangements for reporting to head office; details of information and accounting systems and back-up facilities to be used by the proposed branch; evidence that, from the commencement of operations, information and other systems will be capable of producing all required statutory and prudential returns in an accurate and timely fashion; evidence that arrangements have been established for the prospective branch s external auditors to report to APRA as required. 4. Associates details of any existing or proposed non-banking subsidiaries and associates of the proposed branch in Australia; the nature and scale of their business; and their proposed relationship with the branch. an indication of whether it is intended to transfer business from any banking or non-bank subsidiaries or associates into the proposed branch; an undertaking by the applicant to keep APRA apprised of Annex J2-2

developments in non-banking subsidiaries in Australia. 5. Financial Projections Annex PS J2 detailed balance sheet and earnings projections (including assumptions) for the first three years of operations, including key financial and prudential ratios (as relevant). 6. Other a copy of the certificate of incorporation of the applicant and its authorisation to conduct banking business in its home country: an outline of the supervisory arrangements to which the foreign bank is subject to in its home country; a statement from the applicant s home supervisor: - consenting to the application to establish a branch in Australia; - confirming that the applicant is recognised as a bank under the laws of its home country; - confirming that the applicant is of good financial standing; and - agreeing to co-operate in terms of the Basle Concordat in the supervision of the branch. an undertaking by the applicant to keep APRA informed of any significant developments adversely affecting its financial soundness and/or reputation globally and to provide promptly to APRA copies of its published financial accounts and significant media releases (with translations where appropriate). Annex J2-3