2011
BASEL IIPILLAR 3 DISCLOSURE

YEAR ENDED 30 SEPTEMBER 2011
APS 330: CAPITAL ADEQUACY &RISK MANAGEMENT IN ANZANZ Basel II Pillar 3 disclosure

September 2011

Important NoticeThis document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) tomeet its disclosure obligations under the Australian Prudential Regulation Authority (APRA) APS
330 Capital Adequacy: Public Disclosure of Prudential Information.
This disclosure was prepared as at 30 September 2011. ANZ has a continuous disclosure policy,
under which ANZ will immediately notify the market of any material price sensitive information
concerning the Group, in accordance with legislative and regulatory disclosure requirements.

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ANZ Basel II Pillar 3 disclosure

September 2011

TABLE OF CONTENTS1
Chapter 1 – Highlights ..............................................................................................................3
Chapter 2 – Introduction...........................................................................................................5
Purpose of this document ................................................................................................5
Chapter 3 – Risk appetite and governance .................................................................................. 6
Risk types…… ................................................................................................................6
Risk appetite framework..................................................................................................6
Risk management governance..........................................................................................7
Chapter 4 – Group structure and capital adequacy .......................................................................9
Table 1
Scope of application .....................................................................................9
Table 2
Capital structure ........................................................................................ 12
Table 3
Capital adequacy ....................................................................................... 15
Chapter 5 – Credit risk ........................................................................................................... 21
Table 4Credit risk – General disclosures .................................................................. 21
Table 5Credit risk – Disclosures for portfolios subject to the Standardised approachand supervisory risk weighting in the IRB approach........................................ 35
Table 6
Credit risk – Disclosures for portfolios subject to Advanced IRB approaches ...... 36
Table 7
Credit risk mitigation disclosures ................................................................. 46
Table 8General disclosures for derivatives and counterparty credit risk ....................... 51
Chapter 6 – Securitisation....................................................................................................... 53
Table 9Securitisation disclosures ............................................................................ 53
Chapter 7 – Market risk .......................................................................................................... 63
Table 11
Market risk – Internal models approach ........................................................ 63
Table 10Market risk – Standardised approach............................................................ 67
Chapter 8 – Operational risk.................................................................................................... 68
Table 12
Operational risk ......................................................................................... 68
Chapter 9 – Equities............................................................................................................... 72
Table 13Equities – Disclosures for banking book positions........................................... 72
Chapter 10 – Interest Rate Risk in the Banking Book.................................................................. 74
Table 14
Interest Rate Risk in the Banking Book ......................................................... 74
Chapter 11 – Liquidity risk ...................................................................................................... 77
Appendix 1 – Detail of capital structure .................................................................................... 79
Appendix 2 – ANZ Bank (Europe) Limited.................................................................................. 81

1

Each table reference adopted in this document aligns to those required by APS 330 to be disclosed at year end.

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ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 1 – Highlights

Capital ratios
11.7%

10.7%

10.1%

10.5%

10.9%
2.2%

2.2%

2.1%

2.4%

2.0%

9.5%

8.5%

8.0%

8.5%

8.5%

Mar 10

Sep 10Mar 11

Sep 11

Strengthening capital position
organic capital generation

through• Tier 1 capital position up 40bps since March
11, with recent CPS3 issuance and organic
capital generation.
• ANZ well capitalised and positioned to
manage transition to Basel III.

Basel IIIfully
harmonised

Hybrid Tier 1
C ommon Equity Tier 1

Exposure at Default ($bn)

700
600

Growth in EAD of 9.0% to $624.0bn in
2H11
624.0

531.7

559.6

572.6

Mar 10

Sep 10Mar 11• Growth was across Residential Mortgages,
Bank & Sovereign and Corporate exposures.

500
400
300
200
100
0
Corporate
Residential Mortgage
Specialised LendingStandardised

Sep 11

Bank & Sovereign
QRR & Other Retail
Other

Movement in Credit Risk Weighted Assets ($bn)
260
15.8

(0.5)

1.3

(1.3)

250
240

248.8

Credit Risk Weighted Assets (CRWA) up
by $15.3bn since September 10

233.5

•

230
220
210
200

Sep 10GrowthData
FX
Review Impact

Risk

Sep 11

3

Growth in CRWA has been driven by
Corporate,
Bank,
Standardised
andSpecialised
Lending
asset
classes,
coupled with the impact of FX over theyear.

ANZ Basel II Pillar 3 disclosure

September 2011

Average Risk Weights (CRWA/EAD)120%

Sep 10Mar 11

Sep 11

100%

96%
90%

80%
61%

57%

60%

Portfolio average risk weight decreased
by 0.9% from March 11 to 39.9% in
September 11
•

53%

40%

•

20%

17%

15%

Standardised

Other

Specialised
Lending

QRR & Other
RetailResidential
Mortgage

Corporate

Bank &
Sovereign0%

Risk improved slightly in Corporate by
0.7%.
Risk also improved in several asset
classes, particular in Other CRWAs,
Specialised Lending and Standardised
exposures (down 6.4%, 2.0% and 1.8%
respectively).

Impaired Assets ($m)
6,561

6,561

6,221
5,581

Material decline in Impaired Assets since
March 11
•

6,001

6,420

5,517

560

141

704

700

Mar 10

Sep 10Mar 11

Sep 11

Restructured

4,881

Reduction driven by slow down inemergence of new impaired assets,
coupled with sales, write-offs andrecoveries.

Impaired Loans/Facilities

Provision ratios (Provisions/CRWA)
2.10%

2.15%

2.10%

1.96%

Provisionslightly
•
•

1.38%

Mar 101.35%

Sep 101.36%

Mar 11

1.28%

Sep 11

Total Provision Balance / C RWA
C ollective Provision Balance / C RWA

4coverageratiosdecreased

Collective provision balance has remained
stable.
Coverage ratios decreased slightly due to
CRWA growth.

ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 2 – Introduction
Purpose of this document
This document has been prepared in accordance with the Australian Prudential Regulation Authority(APRA) ADI Prudential Standard (APS) 330 Capital Adequacy: Public Disclosure of Prudential
Information (APS 330).
APS 330 mandates the release to the investment community and general public of information relating
to capital adequacy and risk management practices. APS 330 has been established to implement Pillar
3 of the Basel Committee on Banking Supervision’s framework for bank capital adequacy, known as‘Basel II’2. In simple terms, Basel II consists of three mutually reinforcing ‘Pillars’:

Pillar 1

Pillar 2

Pillar 3

Minimum capital requirement

Supervisory review process

Market discipline

Minimum capital requirements
for Credit Risk, Operational
Risk, Market Risk and Interest
Rate Risk in the Banking Book

Firm-wide risk oversight,
Internal Capital Adequacy
Assessment Process (ICAAP),
consideration of additional risks,
capital buffers and targets andrisk concentrations, etc

Regular disclosure to themarket of qualitative andquantitative aspects of risk
management, capital adequacy
and underlying risk metrics

APS 330 requires the publication of various levels of information on a quarterly, semi-annual andannual basis. This document is the annual disclosure, which has the most comprehensive
requirements.
Basel II in ANZIn December 2007, ANZ received accreditation for the most advanced approaches permitted under
Basel II for credit risk and operational risk, complementing its existing accreditation for market risk.
Verification of disclosures
These Pillar 3 disclosures have been verified in accordance with Board approved policy, including
ensuring consistency with information contained in ANZ’s Annual Report and in Pillar 1 returns
provided to APRA. This Pillar 3 disclosure is not audited by ANZ’s external auditor.
Comparison to ANZ’s Annual Report
These disclosures have been produced in accordance with regulatory capital adequacy concepts andrules, rather than in accordance with accounting policies adopted in ANZ’s Annual Report. As such,there are differences in some common areas of disclosures. These differences are most pronounced in
the credit risk disclosures, for instance:•

The principal method for measuring the amount at risk is Exposure at Default (EAD), which is theestimated amount of exposure likely to be owed on a credit obligation at the time of default.
Under the Advanced Internal Ratings Based (IRB) approach in APS 113 Capital Adequacy:Internal Ratings-based Approach to Credit Risk, banks are accredited to provide their own
estimates of EAD for all exposures (drawn, commitments or contingents) reflecting the current
balance as well as the likelihood of additional drawings prior to default.

•

Loss Given Default (LGD) is an estimate of the amount of losses expected in the event of default.
LGD is essentially calculated as the amount at risk (EAD) less expected net recoveries fromrealisation of collateral as well as any post default repayments of principal and interest.

•

Most credit risk disclosures split ANZ’s portfolio into regulatory asset classes, which span areas of
ANZ’s internal divisional and business unit organisational structure.

Unless otherwise stated, all amounts are rounded to AUD millions.

2

Basel Committee on Banking Supervision, International Convergence of Capital Measurement and CapitalStandards: A Revised Framework, 2004.

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ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 3 – Risk appetite and governanceRisk types
ANZ is exposed to a broad range of interrelated business risks. The main risks that directly impact
determination of regulatory capital are as follows:•

Credit risk - the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract.

•

Market risk - the risk to ANZ’s earnings arising from changes in interest rates, currency exchange
rates and credit spreads, or from fluctuations in bond, commodity or equity prices. ANZ has
grouped market risk into two broad categories to facilitate the measurement, reporting andcontrol of market risk:•

Traded market risk - the risk of loss from changes in the value of financial instruments due tomovements in price factors for physical and derivative trading positions. Trading positions
arise from transactions where ANZ acts as principal with clients or with the market.

•

Non-traded market risk (or balance sheet risk) - comprises Interest Rate Risk in the Banking
Book and the risk to the AUD denominated value of ANZ’s capital and earnings due to foreignexchange rate movements.

•

Operational risk - the risk of loss resulting from inadequate or failed internal controls or fromexternal events, including legal risk but excluding reputation risk3.

•

Equity risk - is the potential loss that may be incurred on equity investments in the banking book.

•

Securitisation risk - the risk of credit related losses greater than expected due to a securitisation
failing to operate as anticipated, or of the values and risks accepted or transferred, not emerging
as expected.

Other key risks faced by ANZ, but which do not directly impact determination of regulatory capital,
include:•Strategic risk - is defined to be the potential for loss arising from a failure in ANZ’s strategies.
These include strategies designed to address or anticipate changes in the competitive, client,
political or regulatory environments.

•

Business risk - the risk of financial loss due to unexpected movements in volume, profit margin,
and operating expenses (excluding risks elsewhere defined) arising from unexpected changes inthe business environment, customer preferences and/or competitor actions.

•

Liquidity risk - the risk that ANZ has insufficient capacity to fund increases in assets, or is unable
to meet its payment obligations as they fall due, including repaying depositors or maturingwholesale debt.

•

Compliance risk - is defined as the probability and impact of an event that results in a failure toact in accordance with laws or codes of conduct applicable to ANZ’s businesses.

•

Reputation risk - is defined as the risk of loss caused by adverse perceptions of ANZ held by the
public, shareholders, investors, regulators, or rating agencies that directly or indirectly impact
earnings, capital adequacy or value.

Risk appetite framework
ANZ's risk appetite is set by the Board and integrated within ANZ’s strategic objectives. The risk
appetite framework underpins fundamental principles of strong capitalisation, robust balance sheet
and sound earnings, which protects ANZ’s franchise and supports the development of an enterprisewide risk culture.

3
Regulatory Capital is calculated in accordance with the definition of Operational Risk outlined in APS 115 Capital
Adequacy: Advanced Measurement Approaches to Operational Risk, and therefore excludes reputation risk
considerations.

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ANZ Basel II Pillar 3 disclosure

September 2011

The framework provides an enforceable risk statement, on the amount of risk ANZ is willing to accept.
It supports strategic and core business activities and customer relationships ensuring that:•

Only permitted activities are engaged in.

•

The scale of permitted activities, and subsequent risk profile, does not lead to potential losses or
earnings volatility that exceeds ANZ approved risk appetite.

•

Risk is expressed quantitatively via limits and tolerances.

•

Management focus is brought to bear on key and emerging risk issues and mitigating actions.

•

Risk is linked to the business by informing, guiding and empowering the business in executing
strategy.

Risk management governance
ANZ’s Board has ultimate responsibility for risk management, and has three key committees focusedon risks that impact regulatory capital.

Risk
Committee

Audit
Committee

GovernanceCommittee

Assists the Board in the effective discharge of the Board’s responsibilities forbusiness, market, credit, equity and other investment, financial, operational,
liquidity, compliance and reputation risk management.

In addition to its role reviewing financial reporting principles and policies,
controls and procedures, the Audit Committee also reviews prudential
supervision procedures required by regulatory bodies relating to financial
reporting and oversees the work of Internal Audit.
Ensures an appropriate Board and Committee structure is in place. Reviews
the development of and approves corporate governance policies and principles
applicable to ANZ.

The Chair and members of these committees are non - executive directors, and are appointed by the
Board. Internal Audit provides independent and objective assurance around ANZ’s risk management
and control effectiveness, and its primary reporting line is to the Audit Committee.
ANZ’s Chief Executive Officer (CEO) creates and delegates powers to various executive management
committees, several of which perform functions that support the Risk Committee. The executive
committees most relevant to the risks described above and overall capital management at ANZ are as
follows:
Group Asset and Liability Committee (GALCO)GALCO is responsible for the oversight and strategic management of ANZ’s balance sheet, liquidityand funding positions and capital management activities. This ensures they are aligned to adding
shareholder value by managing and positioning the balance sheet consistent with ANZ’s appetite forrisk, maintaining ANZ’s preferred AA rating category, and striving for best-practice corporate
governance. Specifically, GALCO co-ordinates, approves and, where necessary, directs:•

Liquidity and funding activities, to ensure that these are managed in a way consistent with ANZ’s
strategy and within ANZ’s appetite for liquidity risk.

•

The management of ANZ’s capital management framework to ensure that ANZ is adequately
capitalised to cover its material risks and exposures in an efficient and effective manner.

•

Balance sheet management activities including management of non-traded related risks andexposures.

In all cases this is in accordance with ANZ’s risk appetite and limits defined by the Board, regulatory
requirements, and international best practice.
GALCO is chaired by ANZ’s Chief Financial Officer (CFO) and meets at least six times per year. GALCO
is supported by specialist committees that cover capital management and non-traded market risk, aswell as regional asset and liability management committees.

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ANZ Basel II Pillar 3 disclosure

September 2011

Capital Management Policy Committee (CMPC)CMPC is a sub-committee of GALCO, with responsibility for the oversight and control of ANZ’s capitaland portfolio measurement framework, addressing economic and regulatory capital requirements.
CMPC is also responsible for making capital management and portfolio measurement related
recommendations to GALCO.
The Committee’s main objective is to ensure ANZ’s regulatory and economic capital management
activities are aligned with GALCO’s objectives, with focus on:•

Internal Capital Adequacy Assessment Process (ICAAP), aligning capital levels and targets to risk
appetite and policies and processes by which ANZ identifies, measures, monitors and manages
risks.

•

Analysing economic capital in context of changes in material risks, emerging risks and/or
methodology changes.

•

Stress testing reviews and updates.

CMPC is chaired by ANZ’s CFO (or in absence, ANZ’s Chief Risk Officer (CRO)) and shall normallymeet six times a year.
Credit and Market Risk Committee (CMRC)
CMRC is a senior executive management forum responsible for the oversight and control of credit andtraded market risk and non-traded market risk. Its responsibilities and duties include:•

Oversee the risk appetite framework.

•

Approve credit and market risk policies.

•

Oversee credit and market risk model performance.

•

Ensure comprehensive credit and market risk control, including handling of emerging issues.

•

Approve business writing strategies.

•

Review credit provisions.

•

Oversee credit portfolio composition, including large exposures, risk grade migration, risk
concentrations and changes to delinquency patterns.

•

Set and oversee market risk limits.

CMRC is chaired by ANZ’s CRO and meets as required, and is supported by a specialist committeethat covers credit ratings systems.
Credit Ratings System Oversight Committee (CRSOC)
CRSOC provides oversight and control of the Internal Ratings System for credit risk across ANZ. It
provides governance over ratings models, as well as associated pricing and collections models or tools
including:•Approving the content and design of the rating system, including models and methodology for
Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD).

•

Prioritisation, monitoring and approval of model changes, enhancements and re-builds.

•

Performance monitoring of internal rating system models.

•Monitor annual independent validation of use and performance of all models.

CRSOC is chaired by the CRO Australia and shall normally meet six times a year. It supports CMPC
and CMRC, and in turn is supported by working groups.
Operational Risk Executive Committee (OREC)OREC is the primary senior executive management forum responsible for the oversight of the control
environment managing compliance and operational risk. Its main responsibilities and duties include:•

Endorse ANZ’s Operational Risk Framework for approval by the Board Risk Committee.

•

Approve ANZ’s Group Compliance Framework.

•

Approve Operational Risk policies and Compliance policies.

•

Monitor operational risk policies and compliance profiles, emerging risks, incidents, trends andremediation, including treatment plans for extreme risks.

OREC is chaired by ANZ’s CRO and currently meets five times per year.
Reputation Risk Committee (RRC)
The purpose of the RRC is to assist ANZ businesses, Risk, Compliance and Legal in partnership toeffectively discharge their responsibility for managing reputation risk in relation to environmental,social, business, product and regulatory issues.
RRC is chaired by ANZ’s CRO and normally meets five times a year or as requested/required.
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ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 4 – Group structure and capital adequacy
Table 1

Scope of application

Top corporate entity
The top corporate entity in the reporting group is Australia and New Zealand Banking Group Limited.
Capital reporting and measurement
To ensure that an Authorised Deposit-taking Institution (ADI) is adequately capitalised on both astand alone and group basis, APRA adopts a tiered approach to the measurement of an ADI’s capital
adequacy by assessing the ADI’s financial strength at three levels:•

Level 1 - being the ADI i.e. Australia and New Zealand Banking Group Limited, consolidated with
APRA approved subsidiaries, to form the ADI’s Extended Licensed Entity (ELE).

•

Level 2 - being the consolidated group for financial reporting purposes adjusted to exclude
associates activities and certain subsidiaries excluded under APS 110 Capital Adequacy that
undertake the following business activities:••

Insurance businesses (including friendly societies and health funds).

•

Acting as manager, responsible entity, approved trustee, trustee or similar role in relation to
funds management.

•

Non-financial (commercial) operations.

•

Securitisation special purpose vehicles to which assets have been transferred in accordancewith APRA's requirements as set out in APS 120: Securitisation.

Level 3 - the consolidated group for financial reporting purposes.

ANZ measures capital adequacy monthly and reports for prudential purposes on a Level 1 and Level 2
basis, however is not required to report on a Level 3 basis. This Pillar 3 report is based on the Level 2
prudential structure.

Level 1

Level 2

Level 3

ANZ National Bank Ltd
Insurance Business

Australia and New
Zealand Banking GroupLtd

OnePathOther

Other International
ADI’s

Extended Licence
Entity Subsidiaries

Other Level 2
Subsidiaries
EsandaE*TRADE
Other

Other Deconsolidated
Subsidiaries
Trustee / Funds
Management Companies
Other

Refer to Note 38 of ANZ’s 2011 Annual Report for a list of all material subsidiaries and a brief
description of their key activities.

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ANZ Basel II Pillar 3 disclosure

September 2011

Accounting consolidation
The financial statements consolidate the financial statements of the company and all its subsidiaries
where it is determined that there is a capacity to control. Where subsidiaries have been sold or
acquired during the year, their operating results have been included to the date of disposal or fromthe date of acquisition. Control means the power to govern, directly or indirectly, the financial andoperating policies of an entity so as to obtain benefits from its activities. All the facts of a particularsituation are considered when determining whether control exists. Control is usually present when an
entity has:•Power over more than one-half of the voting rights of the other entity; or•Power to govern the financial and operating policies of the other entity; or•Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body; or•Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body of the entity.

In addition, potential voting rights that are presently exercisable or convertible are taken into accountin determining whether control exists.
In relation to special purpose entities, control is deemed to exist where in substance:•

The majority of the residual risks and rewards from their activities accrue to the Group; or•

The Group control decision making powers so as to obtain the majority of the risks and rewards
from their activities.

Refer to Note 1 of ANZ’s 2011 Annual Report for a description of the principal accounting policies
adopted in the preparation of ANZ’s financial report.
Entities excluded from Level 2
Investments in entities deconsolidated from the Level 3 group to determine Level 2 for prudential
purposes are deducted from regulatory capital and the assets of those entities are excluded fromaggregate Risk Weighted Assets (RWA).
The material entities excluded from Level 3 to determine Level 2 are:•Insurance entities
OnePath (AU) Life Limited and OnePath (AU) General Insurance Limited
OnePath (NZ) Insurance Holdings Limited and One Path (NZ) Life Limited
ANZ Cover Insurance Pty Limited
ANZ Lenders Mortgage Insurance Pty Limited•

Trustee/Fund Manager
OnePath Funds Management Limited and OnePath Custodians Limited
ANZ Trustees Limited

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ANZ Basel II Pillar 3 disclosure

September 2011

Restrictions on transfers of capital within ANZANZ operates branches and locally incorporated subsidiaries in many countries. These operations arecapitalised at an appropriate level to cover the risks in the business and to meet local prudential
requirements. This level of capitalisation may be enhanced to meet local taxation and operational
requirements. Any repatriation of capital from subsidiaries or branches is subject to meeting therequirements of the local prudential regulator and/or the local central bank.
Apart from ANZ’s operations in New Zealand, local country capital requirements do not impose any
material call on ANZ’s capital base. ANZ undertakes banking activities in New Zealand principally
through its wholly owned subsidiary, ANZ National Bank Limited (ANZ National), which is subject tominimum capital requirements as set by the Reserve Bank of New Zealand (RBNZ). The RBNZ has
adopted the Basel II framework, effective from 1 January 2008, and ANZ National has been accredited
to use the advanced approach for the calculation of credit risk and operational risk. ANZ National
maintains a buffer above the minimum capital base required by the RBNZ. This capital buffer has been
calculated via the ICAAP undertaken for ANZ National, to ensure ANZ National is appropriately
capitalised under stressed economic scenarios.
Capital deficiencies in non-consolidated subsidiaries
The aggregate amount of any under-capitalisation of any non-consolidated subsidiary (or subsidiaries)that is required to be deducted from capital is nil (March 2011 and September 2010: nil).

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ANZ Basel II Pillar 3 disclosure

Table 2September 2011

Capital structure

ANZ’s regulatory capital calculation is governed by APRA’s prudential standards which adopt a riskbased capital assessment framework, based on the Basel II capital measurement standards. This risk
based approach requires eligible capital to be divided by total RWA, with the resultant ratio being used
as a measure of an ADI’s capital adequacy. APRA determines Prudential Capital Ratios (PCRs) for Tier
1 and Total Capital, with capital as the numerator and RWAs as the denominator.
APRA determines PCRs for Tier 1 and Total Capital at both Level 1 and Level 2 under its prudential
standards APS 110. Eligible capital is defined by APS 111 – Capital Adequacy: Measurement of Capital,
and the RWA calculations are predominantly contained in APS 113 – Capital Adequacy: Internal
Ratings-based Approach to Credit Risk, APS 115 – Capital Adequacy: Advanced Measurement
Approach to Operational Risk, APS 116 Capital Adequacy: Market Risk and APS 117 – Capital
Adequacy: Interest Rate Risk in the Banking Book.
Regulatory capital is divided into Tier 1, carrying the highest capital elements, and Tier 2, which has
lower capital elements, but still adds to the overall strength of the ADI.
Tier 1 capital is comprised of ‘Fundamental’ capital, ‘Residual’ capital, and ‘Tier 1 deductions’.
Fundamental capital comprises shareholders’ equity adjusted for items which APRA does not allow as
regulatory capital or classifies as lower forms of regulatory capital.
Fundamental capital includes the following significant adjustments:•

Residual Tier 1 capital instruments included within shareholders’ equity are excluded.

•

Reserves exclude the Hedging reserve and Available-for-sale revaluation reserve, and reserves of
insurance, funds management and securitisation subsidiaries and associates excluded for Level 2
purposes.

•

Retained earnings excludes retained earnings of insurance, funds management and securitisation
subsidiaries and associates excluded for Level 2 purposes, but includes capitalised deferred fees
forming part of loan yields that meet the criteria set out in the prudential standard.

•

Current year (net of tax) earnings is net of any interim and special dividends paid during thecurrent year and the expected dividend payments (net of the expected dividend reinvestment
under the Dividend Reinvestment Plan and Bonus Option Plan) for ordinary shares and Residual
capital instruments, and excludes profits of insurance, funds management and securitisation
subsidiaries and associates excluded for Level 2 purposes.

Residual capital covers ‘Non-innovative’ and ‘Innovative’ hybrid Tier 1 instruments with limits
restricting the volume that can be counted as Tier 1 capital.
ANZ has on issue four outstanding Non-innovative hybrid Tier 1 capital instruments:•

ANZ Convertible Preference Shares. On 30 September 2008 ANZ issued $1,081 million of
convertible preference shares (CPS1), on 17 December 2009 ANZ issued $1,969 million of
convertible preference shares (CPS2) and on 28 September 2011 ANZ issued $1,340 million of
convertible preference shares (CPS3) that mandatorily convert into ordinary shares on 16 June
2014, 15 December 2016 and 1 September 2019 respectively, subject to certain conditions being
satisfied. They may also convert earlier under certain circumstances and ANZ, subject to APRA’s
approval, has a right to convert CPS3 in its discretion on each semi-annual dividend payment datefrom 1 September 2017. In particular, CPS3 will mandatorily convert into ordinary shares if ANZ’s
Common Equity Capital Ratio4 is equal to or less than 5.125% (or APRA determines that to be thecase). The number of shares issued to a CPS3 holder on conversion following a breach of thatratio is limited to the Maximum Conversion Number of 10.2407 ordinary shares per CPS3
(although the CPS3 terms in respect of the Maximum Conversion Number may be amended once
APRA’s Basel III regulations are finalised). CPS3 may also be redeemed for cash on each semiannual dividend payment date from 1 September 2017, subject to APRA’s approval. The
distributions are preferred, non-cumulative, payable quarterly (in respect of CPS1 and CPS2) andsemi-annually (in respect of CPS3) and based on the 90 day (in respect of CPS1 and CPS2) and180 day (in respect of CPS3) Australian Bank Bill Rate plus a margin of 250 basis points (inrespect of CPS1) and 310 basis points (in respect of CPS2 and CPS3) and are subject to ANZ’s
Directors resolving to pay in their absolute discretion and other payment tests being satisfied. Ina winding-up of ANZ, the convertible preference shares will rank equal with other preference
shares, but behind all depositors and creditors and ahead of ordinary shareholders.

•

UK Stapled Securities. On 15 June 2007 ANZ raised GBP450 million of non-cumulative
mandatory convertible stapled securities. On 15 June 2012, or an earlier date under certain
circumstances, the UK Stapled Securities will mandatorily convert into ordinary shares, subject to4

Common Equity Tier 1 is Tier 1 less Residual Tier 1 Capital.

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ANZ Basel II Pillar 3 disclosure

September 2011

certain conditions being satisfied. The distributions are non-cumulative at a fixed rate of 6.54%
payable semi-annually. In a winding-up of ANZ, the ANZ preference shares forming part of the UK
Stapled Securities will rank equal with other preference shares, but behind all depositors andcreditors and ahead of ordinary shareholders.
ANZ has on issue two Innovative hybrid Tier 1 capital instruments:•

US Trust Securities. On 27 November 2003, ANZ issued USD750 million of non-cumulative trust
securities with an initial call date of 15 December 2013 and a coupon rate of 5.36%. On 15
December 2013, ANZ has the right to redeem the US Trust Securities for cash, subject to APRA
approval. If ANZ does not exercise this right, holders are entitled to require ANZ to exchange the
US Trust Securities into ordinary shares. The distributions are non-cumulative payable semiannually. In a winding-up of ANZ, the ANZ preference shares forming part of the US Trust
Securities will rank equal with other preference shares, but behind all depositors and creditors
and ahead of ordinary shareholders.

•Euro Trust Securities. On 13 December 2004, ANZ issued EUR500 million of non - cumulative
trust securities raising $871 million, at the spot rate on the date of issue. Distributions are noncumulative payable quarterly based upon the three month EURIBOR rate plus a margin of 66
basis points up until 15 December 2014, at which date ANZ has the right to redeem the Euro
Trust Securities for cash (subject to APRA approval). After this date, the distribution rate is a rate
based on the three month EURIBOR rate plus a margin of 166 basis points. In a winding-up of
ANZ, the ANZ preference shares forming part of the Euro Trust securities will rank equal withother preference shares, but behind all depositors and creditors and ahead of ordinary
shareholders.

For more information on these instruments, refer to the Loan Capital and Share Capital notes (Notes
27 and 28 respectively) in ANZ’s 2011 Annual Report.
Tier 1 deductions include amounts deducted solely from Tier 1, mainly intangible assets i.e. goodwill,value in force as to insurance/investment business portfolios; capitalised software, capitalised
brokerage and borrowing expenses, net deferred tax assets and deductions taken 50% from Tier 1
and 50% from Tier 2, which mainly include the tangible component of investment in other subsidiaries
and investments in associates regulated by APRA, or their overseas equivalent, and the amount of
Expected Losses (EL) in excess of Eligible Provisions for Loan Losses (net of tax).
Tier 2 capital is comprised of Upper and Lower Tier 2 capital, less capital deductions taken 50% fromTier 2 capital. Upper Tier 2 capital mainly comprises perpetual subordinated debt instruments, whilst
Lower Tier 2 comprises dated subordinated debt instruments which have a minimum term of 5 years
at issue date.
ANZ has two instruments that qualify as Upper Tier 2 capital:•

USD300 million note issued by ANZ on 30 October 1986 which pays a rate of 6 month LIBOR plus
15 basis points.

•

NZD835 million note issued by ANZ National on 17 April 2008 which pays a fixed rate of 9.66%(incorporating a margin of 200 basis points) for five years payable semi-annually. At the first calldate of 18 April 2013, if not called, the interest rate resets to a fixed rate at the five year swap
rate plus 200 basis points. At the second call date of 18 April 2018, if not called, the interest rate
resets to a floating rate at the 3 month Forward Rate Agreement rate plus 300 basis points. The
Notes are callable on any interest payment date thereafter.

To qualify as Lower Tier 2 capital, the instrument must have a minimum original term of five years
and the amount eligible for inclusion in capital is amortised on a straight line basis at a rate of 20%
per annum over the last four years to maturity. For more details on these Lower Tier 2 capital
instruments, refer to the Subordinated Notes section of the Loan Capital note (Note 27) in ANZ’s 2011
Annual Report.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.

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ANZ Basel II Pillar 3 disclosure

September 2011

Table 2: Capital Structure
The following table summarises ANZ’s Level 2 capital position as at 30 September 2011:

Tier 1 capitalSep 11$M

Mar 11$M

Sep 10$M

Paid-up ordinary share capital

21,577

20,83920,140Reserves(2,266)(3,143)(2,574)Retained earnings

15,123

14,732

13,685

Non-controlling interests

41

64

64

34,47532,49231,315Innovative Tier 1 capital

1,641

1,597

1,646

Non-innovative Tier 1 capital

5,111

3,751

3,787

Gross Tier 1 capital

41,227

37,84036,748Goodwill(2,968)(2,795)(2,910)

Other deductions from Tier 1 capital only

(4,572)(4,220)(4,121)50/50 deductions from Tier 1 capital(3,071)(3,055)(3,026)(10,611)(10,070)(10,057)

30,616

27,77026,691

Perpetual subordinated notes

965

905

946

General reserve for impairment of financial assets net of attributable
deferred tax asset5

266

264

280

Fundamental Tier 1 capital

Deductions from Tier 1 capital

Net Tier 1 capital

Tier 2 capital
Upper Tier 2 capital

Lower Tier 2 capital

5,042

6,201

6,644

Gross Tier 2 capital

6,273

7,370

7,870

Upper and lower Tier 2 capital deductions

(28)

(28)

(28)

50/50 deductions from Tier 2 capital(3,071)(3,055)(3,026)

Deductions from Tier 2 capital(3,099)(3,083)(3,054)

Net Tier 2 capital

3,174

4,287

4,816

Total capital base

33,79032,05731,507

Further information on capital structure can be found in Appendix 1.

5Under Basel II, “General reserve for impairment of financial assets net of attributable deferred tax asset” consistsof the surplus of the general reserve for impairment of financial assets net of tax and/or the provisions attributable
to the standardised portfolio.

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ANZ Basel II Pillar 3 disclosure

Table 3September 2011

Capital adequacy

Capital management approach
ANZ pursues an active approach to capital management, which is designed to protect the interests ofdepositors, creditors and shareholders. This involves the ongoing review and Board approval of thelevel and composition of ANZ’s capital base, assessed against the following key policy objectives:•

Regulatory compliance such that capital levels exceed APRA’s PCRs both at Level 1 and Level 26
for Tier 1 and Total Capital, and the US Federal Reserve’s minimum Tier 1 and Total Capital
adequacy requirements at Level 2 via ANZ’s Foreign Holding Company licence in the United Statesof America.

•

Capital levels are aligned with the risks in the business and to meet strategic and businessdevelopment plans through ensuring that available capital exceeds the level of Economic Capitalrequired to support the Ratings Agency ‘default frequency’ confidence level for a “AA” credit rating
category bank. Economic Capital is an internal estimate of capital levels required to support risk
and unexpected losses above a desired target solvency level.

•

Capital levels are commensurate with ANZ maintaining its preferred “AA” credit rating category
for senior long-term unsecured debt given its risk appetite outlined in its strategic plan.

•

An appropriate balance
management principles.

betweenmaximising

shareholder

returns

andprudent

capitalANZ achieves these objectives through the ICAAP whereby ANZ conducts detailed strategic and capitalplanning over a medium term time horizon.
Annually, ANZ conducts a detailed strategic planning process over a three-year time horizon. This
process involves forecasting key economic variables which Divisions use to determine key financial
data for their existing business. New strategic initiatives to be undertaken over the planning period
and their financial impact are then determined. These processes are used for the following:•

A review of capital ratios, targets, and levels of different classes of capital against ANZ’s risk
profile and risk appetite outlined in the Strategic Plan. ANZ’s capital targets reflect the key policy
objectives above, and the desire to ensure that under specific stressed economic scenarios,
capital levels are sufficient to remain above both Economic Capital and PCR requirements.

•

Stress tests are performed under different economic conditions to ensure a comprehensive review
of ANZ’s capital position both before and after mitigating actions. The stress tests determine thelevel of additional capital (i.e. the ‘capital buffer’ above Pillar 1 minimum capital) needed toabsorb losses that may be experienced during an economic downturn.

•Stress testing is integral to strengthening the predictive approach to risk management and is a
key component in managing risks and business writing strategies. It creates greater
understanding of the impacts on financial performance through modelling relationships andsensitivities between geographic, industry and business unit exposures under a range of macro
economic scenarios. ANZ has a dedicated stress testing team within Risk Management thatmodels and reports to management and the Board Risk Committee on a range of scenarios andstress tests.

•

Results are subsequently used to:•

Recalibrate ANZ’s management targets for minimum and operating ranges for its respectiveclasses of capital such that ANZ will remain compliant with APRA’s PCRs and the US Federal
Reserve’s minimum Tier 1 and Total Capital requirements.

•

Identify the level of organic capital generation and hence determine current and future
capital requirements for the Company (Level 1) and the Group (Level 2).

From these processes, a capital plan is developed and approved by the Board which identifies thecapital issuance requirements, capital securities maturity profile and options around capital products,
timing and markets to execute the Capital Plan under differing market and economic conditions.
The Capital Plan is maintained and updated through a monthly review of forecast financial
performance, economic conditions and development of business initiatives and strategies. The Boardand senior management are provided with monthly updates of ANZ’s capital position. Any actions
required to ensure ongoing prudent capital management are submitted to the Board for approval.

6

In addition to the prudential capital oversight by APRA, ANZ’s branch operations and major banking subsidiary
operations are overseen by local regulators such as the Reserve Bank of New Zealand, the US Federal Reserve, the
UK Financial Services Authority, the Monetary Authority of Singapore, the Hong Kong Monetary Authority and the
China Banking Regulatory Commission who may impose minimum capitalisation rates on those operations.

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ANZ Basel II Pillar 3 disclosure

September 2011

Capital targets
Target ratios are set to be consistent with ANZ’s risk appetite and Economic Capital methodology, plus
an allowance for the impact of relevant stress testing on the capital position. The approach ensurescapital requirements are manageable and consistent with long term credit ratings and minimum
prudential capital requirements, even during periods of stress.
Throughout the financial year, ANZ maintained compliance with the minimum Tier 1 and Total Capitalratios at Level 1 and Level 2 set by APRA, and the US Federal Reserve for Level 2, as well as
applicable capitalisation rates set by local regulators in countries where ANZ operates branches andsubsidiaries.
ANZ has adopted the Common Equity Tier 1 and Tier 1 capital ratios as its principal capitalmanagement targets at Level 2. Given recent difficult economic and financial market conditions, ANZ
has maintained both ratios well above its minimum target.
Regulatory change
Following on from the December 2010 Basel Committee paper on prudential capital reforms, on 6
September 2011 APRA released a discussion paper detailing the implementation of Basel III capitalreforms in Australia.
The discussion paper proposes to adopt the Basel III reforms with increased capital deductions from
Common Equity Tier 1 capital, higher capital targets with prescribed minimum capital buffers; andtighter requirements around hybrid Tier 1 and Tier 2 securities. In addition to higher risk weightingsfor counterparty credit risk proposed by the December 2010 Basel Committee paper, the adjustments
to ANZ’s capital ratios proposed by the discussion paper are set out below and APRA is proposing
these become effective from January 2013. The APRA proposals generally adopt a more conservative
approach and ANZ believes full alignment to Basel III would be more appropriate.
The Basel Committee is still to release final proposals for contingent capital and measures to address
systematic and inter-connected risks – these are expected in 2012.

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ANZ Basel II Pillar 3 disclosure

September 2011

Common Equity
Tier 1 Capital

Tier 1 Capital

Total Capital

APRA September 2011 Basel II

8.5%

10.9%

12.1%

Plus: Dividend not provided for (net of DRP)

0.5%

0.5%

0.5%

Investment in ADIs and overseas equivalents(0.4%)(0.4%)-

Investment in ANZ insurance subsidiaries including OnePath(0.4%)(0.4%)-

Expected losses in excess of eligible provisions(0.2%)(0.2%)-

Other(0.1%)(0.1%)(0.1%)-(0.2%)(0.4%)

7.9%

10.1%

12.1%

Less: estimated increase in RWA8

(0.4%)(0.5%)(0.6%)

Pro forma ratio - should the APRA Basel III proposals be
adopted

7.5%

9.6%

11.5%

10% allowance for investments in insurance subsidiaries
and ADIs including overseas equivalents

0.8%

0.7%

0.6%

Up to 5% allowance for deferred tax assets9

0.2%

0.2%

0.2%

Other capital items

0.2%

0.2%

0.3%

8.7%

10.7%

12.6%

0.6%

0.7%

0.7%

Less: Tier 2 capital deductions moved to Common Equity Tier 1

Less: 10% reduction of existing hybrid Tier 1 and Tier 2 securities7

Plus: adjustments to fully align to Basel III

Pro forma Basel III (fully aligned capital)
Plus: additional APRA Basel II conservative RWA methodologies
Mortgage 20% LGD floor and others
IRRBB RWA (APRA Pillar 1 approach)
Pro forma Basel III fully aligned

0.2%

0.3%

0.4%

9.5%

11.7%

13.7%

International capital ratio comparisons
One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within
and across jurisdictions.
International investors should be aware that there are a number of features of APRA’s implementationof Basel II that have the effect of making key capital adequacy ratios appear lower than would be thecase if they were calculated under the rules in other jurisdictions. The following table shows ANZ’sestimation of its Common Equity Tier 1, Tier 1 and Total Capital adequacy ratios under UK rules (setby the FSA.

As At
Sep 11 FSA

Sep 11

Mar 11

Common Equity Tier 1

11.4%

8.5%

8.5%

8.0%

Tier 1

14.0%

10.9%

10.5%

10.1%

Tier 2

0.9%

1.2%

1.6%

1.8%

Total capital
Risk weighted assets $M

Sep 10

14.9%

12.1%

12.1%

11.9%

257,512279,964

264,236

264,242

For Tier 1 capital, the major reasons for the differences are that FSA:•Does not require a deduction for accrued dividends (although APRA does give credit for expectedshares to be issued under a dividend reinvestment plan).

•

Does not require a Tier 1 deduction for certain capitalised expenses and net deferred tax assets.

7
From 1 January 2013 transitional treatment for existing securities on issue will apply. The maximum that can be
included in the respective capital base is 90% of the volume of eligible transitional Tier 1 and Tier 2 securities on
issue at 31 December 2012. The cap will reduce by 10 percentage points each year until 1 January 2022.
8
Excludes additional RWA for Market Risk and Securitisation applicable to APRA enhancements to the Basel II
framework effective 1 January 2012 and potential impacts arising from APRA’s yet to be released Basel III liquidity
reforms.
9
Including alignment of deferred tax asset associated with EL in excess of Eligible Provisions calculation to Basel III
methodology.

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ANZ Basel II Pillar 3 disclosure

September 2011•

Allows the comparison of EL to Eligible Provisions for Loan Loss to be made on a gross basis andany excess is then tax effected, whereas APRA require EL to be compared to Eligible Provisions for
Loan Losses net of tax, and any excess to be taken as 50% Tier 1 deduction and a 50% Tier 2
deduction.

•

Has a more favourable treatment for investments in associates and insurance and funds
management subsidiaries.

For RWA, the major reasons for the differences are:•

APRA has set a 20% floor on the downturn LGD for mortgages (as compared with the 10%minimum set by the FSA).

•

FSA does not require IRRBB to be a Pillar I requirement so it is excluded from prudential capital
adequacy ratios.

•

Differences in the treatment of specialised property lending, equity and margin lending products.

The Australian Bankers’ Association (ABA) has released a detailed fact sheet10 documenting thedifferences between the Australian and UK rules and the implications for prudential capital ratios.

10bankers.asn.au

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ANZ Basel II Pillar 3 disclosure

September 2011

Table 3: Capital Ratios and Risk Weighted Assets11 12
Risk Weighted Assets (RWA)

Sep 11$M

Mar 11$M

Sep 10$M

Corporate

106,120

98,393

101,940

Sovereign

4,365

3,217

2,720

Bank

9,456

6,958

6,135

Residential Mortgage

41,041

40,12638,708Risk weighted assets
Subject to Advanced Internal Rating Based (IRB) approach

Qualifying Revolving Retail

7,468

7,552

7,205

Other Retail

19,24018,485

17,899187,690

174,731

174,60727,757

26,79926,60522,484

20,68020,560

845

406

567

Qualifying Revolving Retail

2,344

2,207

2,279

Other Retail

1,650

1,710

1,396

27,32325,00324,802Credit risk weighted assets relating to securitisation exposures

1,136

1,209

2,091

Credit risk weighted assets relating to equity exposures

1,399

1,635

1,577

Other assets

3,523

3,869

3,835

248,828

233,246

233,517

Credit risk weighted assets subject to Advanced IRB approach

Credit risk Specialised Lending exposures subject to slotting approach

Subject to Standardised approach
Corporate
Residential Mortgage

Credit risk weighted assets subject to Standardised approach

Total credit risk weighted assets
Market risk weighted assets

3,046

2,547

5,652

Operational risk weighted assets

19,651

18,331

17,383

Interest rate risk in the banking book (IRRBB) risk weighted assets

8,439

10,112

7,690

279,964

264,236

264,242

Level 2 Total capital ratio

12.1%

12.1%

11.9%

Level 2 Tier 1 capital ratio

10.9%

10.5%

10.1%

Level 1: Extended licensed entity Total capital ratio

12.3%

12.6%

12.3%

Level 1: Extended licensed entity Tier 1 capital ratio
Other significant Authorised Deposit-taking Institution (ADI) or overseasbank subsidiary:
ANZ National Bank Limited - Total capital ratio

11.5%

11.4%

11.0%

12.7%

12.9%

13.1%

10.0%

9.6%

9.7%

Total risk weighted assets

Capital ratios (%)

ANZ National Bank Limited - Tier 1 capital ratio

11

Specialised Lending exposures subject to slotting approach are those where the main servicing and repayment isfrom the asset being financed, and includes specified commercial property development/investment lending, project
finance and object finance.

12
ANZ National Bank Limited’s capital ratios have been calculated in accordance with Reserve Bank of New Zealandprudential standards.

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ANZ Basel II Pillar 3 disclosure

September 2011

Credit Risk Weighted Assets (CRWA)
Total CRWA increased by $15.3 billion (6.6%) from September 2010 to $248.8 billion. The key
impacts on CRWA were an increase of $4.1 billion (4.1%) in IRB Corporate driven by growth in
Institutional assets and increases of $3.3 billion (54.1%) in IRB Bank and $2.5 billion (10.2%) in
Standardised assets driven by growth in Asia.
Market Risk and IRRBB RWA
The decrease in Market Risk of $2.6 billion (46.1%) is attributed to a combination of increased
portfolio diversification and reduction of volatility in the market risk model. The increase in IRRBB over
the year of $749 million (9.7%) was due to the realisation of previously embedded gains. The increasein operational RWA over the year is due to an update to unexpected loss scenarios for all divisions, anadditional six months of external loss data to the end of December 2010 and internal loss data to theend of June 2011.
Types of exposures in each Basel asset class
The following table details the types of exposures in each Basel asset class:Basel Asset Class

Typical Types of Exposures

Corporate

Individually rated and managed exposures not covered under other categories– mainly lending and off-balance sheet facilities provided to larger companies,
partnerships and other bodies
Exposures to sovereigns and central banks. Includes direct exposures e.g.
bond holdings and indirect e.g. exposures guaranteed by sovereign Export
Credit Agencies (ECAs)
Exposures to non-Group bank counterparties. Includes bond holdings anddeposits with other banks, trade finance exposures and guarantees provided
by other banks
Retail exposures secured by residential properties – mainly home loans,investment loans and equity manager facilities
Retail managed consumer credit card exposures with customer limits less than$100,000
Retail managed exposures other than mortgage and qualifying revolving –includes personal loans, consumer and small business lending, retail small
business lending
Exposures where the main servicing and repayment is from the asset being
financed. Includes specified commercial property development/investment
lending, project finance and object finance
Lending exposures where IRB models cannot be applied – mainly local
business lending and personal lending in Asia and the Pacific
Exposures to securitisation vehicles – mainly liquidity and funding facilities
provided to third party securitisations and securitisation bond exposures
Holding of third party equities where not consolidated or deducted from
capitalMainly fixed assets and margin lending

SovereignBank

Residential
Mortgages
Qualifying Revolving
RetailOther RetailSpecialised LendingStandardised
Securitisation
EquityOther Assets

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ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 5 – Credit risk
Table 4Credit risk – General disclosures

Definition of credit risk
Credit risk is defined as the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract.
Regulatory approval to use the Advanced Internal Ratings-based approach
ANZ has been given approval by APRA to use the Advanced Internal Ratings-based approach to credit
risk, under APS 113. There are however several small portfolios (mainly retail and local corporates in
Asia Pacific) where ANZ applies the Standardised approach to credit risk, under APS 112 Capital
Adequacy: Standardised Approach to Credit Risk.
Credit risk management framework and policies
ANZ has a comprehensive framework to manage credit risk and support sound growth for appropriate
returns. The framework is top down, being defined by credit principles and policies. Credit policies andprocedures cover all aspects of the credit life cycle such as transaction structuring, risk grading, initialapproval, ongoing management and problem debt management, as well as specialist policy topics.
The effectiveness of the credit risk management framework is assessed through various complianceand monitoring processes. These, together with portfolio selection, define and guide the credit
process, organisation and staff.
Organisation
As described in Chapter 3, the CMRC is a senior executive level credit risk committee. The CRSOC
supports the CMRC, by providing group-wide scrutiny of ANZ’s credit rating system.
The primary responsibility for prudent and profitable management of credit risk assets and customer
relationships rests with the business units. An independent credit risk management function is staffedby risk specialists. Independence is achieved by having all credit risk staff ultimately report to theCRO, even where they are embedded in business units. Risk provides independent credit assessment
and approval on lending decisions, and also performs key roles in portfolio management such as
development and validation of credit risk measurement systems, loan asset quality reporting, anddevelopment of credit policies.
The authority to make credit decisions is delegated by the Board to the CEO who in turn delegatesauthority to the CRO. The CRO in turn delegates some of his credit discretion to individuals as part ofa ‘cascade’ of authority from senior to the most junior credit officers. Within ANZ, credit approval foralmost all judgemental lending is made on a ‘dual approval’ basis, jointly by the business writer in thebusiness unit and the respective independent credit risk officer. Programmed credit assessment
typically covers retail and some small business lending, and refers to the automated assessment ofcredit applications using a combination of scoring (application and behavioural), policy rules andexternal credit reporting information. Where an application does not meet the automated assessment
criteria it will be referred out for manual assessment, with assessors considering the decision tool
recommendation. Individuals must complete appropriate ongoing accreditation training in order to be
granted and retain a credit discretion. Credit discretions are reviewed on an annual basis, and may bevaried based on the holder’s performance.

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ANZ Basel II Pillar 3 disclosure

September 2011

Portfolio direction and performance
The credit risk management framework contains several important portfolio direction and performancetools which enable Risk to play a fundamental role in monitoring the direction and performance of theportfolio. These include:•

Business writing strategies that are prepared by the businesses and set out appetite, planned
portfolio growth, capital usage and risk/return profile, and also identify areas that may require
attention to mitigate and improve risk management.

•

Regular portfolio reviews.

•

Exposure concentration limits, covering single customers, industries and cross border risk, toensure a diversified portfolio.

ANZ uses portfolio monitoring and analysis tools, technologies and techniques to assist with portfolio
risk assessment and management. These assist in:•Monitoring, analysing and reporting ANZ’s credit risk profile and progress in meeting portfolio
objectives.

•

Calculating and reporting ANZ’s collective provision, economic capital, EL, regulatory RWA andregulatory expected loss.

•

Assessing impact of emerging issues, and conducting ad hoc investigations and analysis.

•

Validating rating/scoring tools and credit estimates.

•

Ongoing review and refinement of ANZ's credit risk measurement and policy framework.

Reporting – overview and definitions
Credit risk management information systems, reporting and analysis are managed centrally and at thedivisional and business unit level.
Periodic reporting provides confirmation of the effectiveness of processes, highlights emerging issues
requiring attention and allows monitoring of portfolio trends by all levels of management and theBoard.
Examples of reports include EAD, portfolio mix, risk grade profiles and migrations, RWAs, large
exposure reporting, credit watch and control lists, impaired assets and provisions. Within the retailsegments, monthly reporting packs are prepared that focus on such aspects as scoring anddelinquency/slippage monitoring.
Past due facilities
Facilities where a contractual payment has not been met or the customer is outside of contractual
arrangements are deemed past due. Past due facilities include those operating in excess of approved
arrangements or where scheduled repayments are outstanding but do not include impaired assets.
Impaired assets
Facilities are classified as impaired when there is doubt as to whether the contractual amounts due,
including interest and other payments, will be met in a timely manner. Impaired assets include
impaired facilities, and impaired derivatives. Impaired derivatives have a credit valuation adjustment(CVA), which is a market assessment of the credit risk of the relevant counterparties.
Restructured items
Restructured items comprise facilities in which the original contractual terms have been modified forreasons related to the financial difficulties of the customer. Restructuring may consist of reduction ofinterest, principal or other payments legally due, or an extension in maturity beyond those typicallyoffered to new facilities with similar risk.
Collective provisions
As well as holding individual provisions for credit loss, ANZ also holds a collective provision to covercredit losses which have been incurred but have not yet been specifically identified.
Calculation of the collective provision involves placing exposures in pools of similar assets with similarrisk characteristics. The required collective provision is estimated on the basis of historical loss
experience for assets with credit risk characteristics similar to those in the collective pool and includes

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ANZ Basel II Pillar 3 disclosure

September 2011

an allowance for inherent risk associated with the design and use of models. The initial calculationfrom historical loss experience may be adjusted based on current observable data such as changed
economic conditions, and to take account of the impact of inherent risk of large concentrated losses
within the portfolio.
The methodology underpinning calculation of collective provision from historical experience ispredominantly based around the product of an exposure’s PD, LGD and EAD13. ANZ uses slightly
different PD, LGD and EAD factors in the calculation of regulatory capital and regulatory EL14, due tothe different requirements of APRA and accounting standards. The key differences are:•

ANZ must use more conservative LGD assumptions for regulatory capital purposes, such as the
20% LGD floor for retail mortgages and downturn LGD factors.

•

ANZ must use cycle-adjusted PDs for regulatory capital purposes, but uses point-in-time
estimates to calculate provisions.

Essentially these differences reflect the effects of the credit cycle on credit losses. Point-in-time refers
to losses at any given point in the credit cycle, cycle-adjusted refers to adjusting estimates to reflect afull credit cycle and downturn refers to losses at the worst of the cycle and is the most conservative
estimate to use. Regardless of the adjustments, the starting point for all estimates is the output of therating/scoring models and tools to satisfy the in use test15.
Individual provisions
Individual provisions are assessed on a case-by-case basis for all individually managed impaired
assets taking into consideration factors such as the realisable value of security (or other credit
mitigants), the likely return available upon liquidation or bankruptcy, legal uncertainties, estimatedcosts involved in recovery, the market price of the exposure in secondary markets and the amountand timing of expected receipts and recoveries.
Write-offs
Facilities are written off against the related provision for impairment when they are assessed as
partially or fully uncollectable, and after proceeds from the realisation of any collateral have been
received. Where individual provisions recognised in previous periods have subsequently decreased or
are no longer required, such impairment losses are reversed in the current period income statement.
Basel II definition of default
ANZ uses the standard APRA definition of default, so that a default is considered to have occurred withregard to a particular obligor when either or both of the two following events have taken place:•

ANZ considers that the obligor is unlikely to pay16 its credit obligations to ANZ in full, without
recourse by ANZ to actions such as realising available security.

•

The obligor is at least 90 days past due on a credit obligation to ANZ.

Specific provision and general reserve for credit losses
Due to definitional differences, there is a difference in the split between ANZ’s individual provision andcollective provision for accounting purposes and the specific provision and general reserve for credit
losses (GRCL) for regulatory purposes. This does not impact total provisions, and essentially relates tothe classification of collectively assessed provisions on defaulted accounts. The disclosures in thisdocument are based on individual provision and collective provision, for ease of comparison with otherpublished results.

13

PD, LGD and EAD are explained in Table 6.

14

Regulatory EL is explained in Table 6.

15

One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide
range of ongoing management activities, to demonstrate that the model is used in day-to-day management of
exposures and not just for regulatory capital calculation.

16
Elements to be taken as indications of unlikeliness to pay include the factors relating to impairment (irrespective ofwhether the credit obligations are well secured) or ANZ selling the credit obligation at a material credit-related
economic loss.

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ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(b): Period end and average Exposure at Default17 18 19
Sep 11

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

106,120

173,245

166,079

Individual
provision
charge forhalf year$M
150

Sovereign

4,365

52,54044,759

-

Bank

9,456

42,30838,64132-

Residential Mortgage

41,041

234,882

230,771

41

44

Qualifying Revolving Retail

7,468

21,21921,120130

154

Other Retail

19,24029,56329,051

150

173

187,690553,757

530,421503

522

27,75730,92130,06485

114

22,484

22,487

21,964

6

15

845

2,155

1,655

5

3

2,344

2,332

2,062

(2)

10

Advanced IRB approach

Total Advanced IRB approach

Specialised Lending

Write-offs forhalf year$M
151-

Standardised approach
Corporate
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total Standardised approach

Total

1,650

1,620

1,455

23

54

27,32328,594

27,13632

82242,770

613,272

587,621

620

718

17

Exposure at Default in Table 4 includes Advanced IRB, Specialised Lending and Standardised exposures, however
does not include Securitisation, Equities or Other Assets exposures. Exposure at Default in Table 4 is net of credit
risk mitigation such as guarantees, credit derivatives, netting and financial collateral.

18

Some prior period comparatives have been restated to reflect reclassification between asset classes and industries.

19

Average Exposure at Default for half year is calculated as the simple average of the balances at the start and theend of each six month period. Some prior period comparatives have been restated to reflect reclassification between
asset classes and industries.

24

ANZ Basel II Pillar 3 disclosure

September 2011

Mar 11

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

98,393

158,912

158,568

Individual
provision
charge forhalf year$M
191

Sovereign

3,217

36,97736,038

-

Bank

6,958

34,97433,828(8)-

Residential Mortgage

40,126

226,659

223,356

23

40

Qualifying Revolving Retail

7,552

21,02020,892

115

135

Other Retail

18,48528,53828,410133

142174,731507,080

501,092

454

580

26,79929,20728,521

107

56

20,68021,44021,361

25

2

406

1,154

1,317

1

-

Qualifying Revolving Retail

2,207

1,791

1,816

4

25

Other Retail

1,710

1,289

1,201

19

40

25,00325,67425,69549

67

226,533

561,961555,308

610

703

Advanced IRB approach

Total Advanced IRB approach

Specialised Lending

Write-offs forhalf year$M
263-

Standardised approach
Corporate
Residential Mortgage

Total Standardised approach

Total

Sep 10

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

101,940

158,224

156,670

Individual
provision
charge forhalf year$M
209

Sovereign

2,720

35,09934,943

-

Bank

6,135

32,68130,317(5)-

Residential Mortgage

38,708220,055

214,282

65

65

Qualifying Revolving Retail

7,205

20,764

20,580

109

134

Other Retail

17,89928,28328,266140

156

174,607495,106

485,057

518

551

26,60527,83527,349173

144

20,56021,28218,807

14

1

567

1,479

1,307

4

-

Qualifying Revolving Retail

2,279

1,841

923

(3)

7

Other Retail

1,396

1,112

836

38

27

24,802

25,714

21,8725335

226,014548,655534,277744

730

Advanced IRB approach

Total Advanced IRB approach

Specialised Lending

Write-offs forhalf year$M
196-

Standardised approach
Corporate
Residential Mortgage

Total Standardised approach

Total

25

ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(c): Geographic distribution of Exposure at Default

Sep 11

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

112,908

36,78946,035

195,732

Sovereign

15,728

7,732

29,08052,540Bank21,211

4,852

16,24542,308Residential Mortgage

190,815

44,071

2,151

237,037

Qualifying Revolving Retail21,219-2,332

23,551Other Retail

22,175

7,438

1,570

31,183Specialised Lending

24,224

5,929

768

30,921

Total exposures

408,280

106,811

98,181

613,272

Total
$M

Total
$M

Mar 11

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate107,394

34,881

38,077

180,352

Sovereign

15,427

6,102

15,44836,977

Bank

17,772

2,582

14,62034,974

Residential Mortgage

185,462

41,206

1,145

227,813

Qualifying Revolving Retail

21,020-1,791

22,811Other Retail21,726

6,819

1,282

29,827

Specialised Lending

22,742

5,651

814

29,207

Total exposures

391,543

97,24173,177561,961

Total$M

Sep 10

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

105,484

37,69836,324

179,506

Sovereign

13,565

7,373

14,16135,099Bank

17,077

2,958

12,64632,681

Residential Mortgage

178,566

41,565

1,403

221,534

Qualifying Revolving Retail

20,764-

1,841

22,605

Other Retail21,374

6,908

1,112

29,394

Specialised Lending

22,0155,320

500

27,835

Total exposures

378,845

101,822

67,987548,654

26

-Qualifying Revolving Retail-

Qualifying Revolving Retail

6.2%

34,993

217

1.7%

9,735

-

1,731

-

-

-

-

8,004

1.8%

11,048

145

823

-

-

-

-

10,08014.4%

88,225

186

307

-

-

42,151

25,272

20,309

1.5%

8,624

380

2,415

-

-

-

39

5,790

1.8%

9,847

153

786

-

-

-

-

8,908

12.5%

70,337

160

303

-

-

34,781

17,493

17,600Entertainment,
Financial,
Leisure & Investment &Construction
Tourism
Insurance
$M
$M
$M

1.5%

9,161

679

2,490

-

-

-

89

5,903

Entertainment,
Financial,
Leisure & Investment &Construction
Tourism
Insurance
$M
$M
$M

3.3%

18,820

-

7

-

-

-

17,511

1,302

Government
and Official
Institutions
$M

4.4%

26,952

-

8

-

-

-

25,2201,724

Government
and Official
Institutions
$M

5.6%

31,443

223

855

-

-

15

110

30,240

Manufacturing$M

Mar 11

5.8%

35,660

247

878

-

-

16

223

34,296

Manufacturing$M

Sep 11

47.5%

267,210

6

15,067

22,811

227,813

1

316

1,196

Personal$M

45.2%

277,1156

15,78623,551

237,037

-

177

558

Personal$M

7.1%

40,09523,936

870

-

-

21

468

14,800Property
Services$M

6.9%

42,341

24,706

828

-

-

42

497

16,268Property
Services$M

3.3%

18,413

-

612

-

-

21

2

17,778Wholesale
Trade
$M

3.2%

19,755

-

638

-

-

10

28

19,079Wholesale
Trade
$M

2.5%

14,107

-

1,952

-

-

-

-

12,155Retail Trade
$M

2.5%

15,216

-

1,984

-

-

-

-

13,232Retail Trade
$M

2.1%

11,861

2,088

1,000

-

-

47

29

8,697

Transport &Storage$M

2.1%

12,718

2,343

1,007

-

-

42

27

9,299

Transport &Storage$M

4.7%

26,476

2,044

1,892

-

-

88

894

21,558

Other
$M

4.6%

28,506

2,300

2,257

-

-

47

922

22,980

Other
$M

Total
$M

100.0%

561,961

29,207

29,827

22,811

227,813

34,97436,977

180,352

Total$M

100.0%

613,272

30,921

31,18323,551

237,037

42,30852,540195,732

September 201121

27

Other industry includes Health & Community Services, Education, Communication Services, Electricity, Gas & Water Supply, and Personal & Other Services.

20
Property Services includes Commercial property operators, Residential property operators, Retirement village operators/developers, Real estate agents, Non-financial asset investors and Machinery andequipment hiring and leasing.

% of Total

Total exposures

Specialised Lending

2,337

-

Residential Mortgage

Other Retail

-

115

Bank

32,324

Business
Services$M

Agriculture,
Forestry, Fishing& Mining$M

Sovereign

1.6%

9,917

-

1,757

-

-

-

-

8,160

Business
Services$M

6.0%

36,658309

Corporate

Portfolio Type% of Total

Total exposures

Specialised Lending

2,420

-

Residential Mortgage

Other Retail-

85

SovereignBank

33,844

Corporate

Portfolio Type

Agriculture,
Forestry, Fishing& Mining$M

Table 4(d): Industry distribution of Exposure at Default 20 21

ANZ Basel II Pillar 3 disclosure-Qualifying Revolving Retail% of Total

Total exposures

Specialised Lending

6.8%

37,426

187

2,335

-

Residential Mortgage

Other retail-

28

SovereignBank

34,876

Corporate

Portfolio Type

Agriculture,
Forestry, Fishing& Mining
$M

1.7%

9,525

-

1,709

-

-

-

1

7,815

Business
Services
$M

1.6%

8,577

430

2,381

-

-

4

20

5,742

1.8%

10,059

154

762

-

-

-

98

9,045

12.0%

65,857

254

301

-

-

32,43016,477

16,395Entertainment,
Financial,
Leisure & Investment &Construction
Tourism
Insurance$M$M$M

ANZ Basel II Pillar 3 disclosure

28

3.4%

18,458

-

9

-

-

-

17,101

1,348

Government
and Official
Institutions
$M

5.5%

29,932

236

838

-

-

-

255

28,603

Manufacturing$M

Sep 1047.7%

261,731-

14,83922,605

221,534

-

196

2,557

Personal$M

7.2%

39,313

22,461

902

-

-

16

152

15,782

Property
Services$M

3.0%

16,560

-

604

-

-

35

2

15,919Wholesale
Trade
$M

2.5%

13,615

-

1,908

-

-

-

-

11,707Retail Trade
$M

2.0%

11,026

1,915

1,012

-

-

26

28

8,045

Transport &Storage$M

4.8%

26,575

2,198

1,794

-

-

170

741

21,672

Other
$M

Total
$M

100.0%

548,654

27,83529,39422,605

221,534

32,68135,099179,506

September 2011

ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(e): Residual contractual maturity of Exposure at Default22

Sep 11< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

89,07987,02019,516

117

195,732

Sovereign

22,39925,5984,543-

52,540Bank

23,341

18,843124-

42,308Residential Mortgage

2,062

4,475

201,426

29,074

237,037

Portfolio Type

Qualifying Revolving Retail

-

-

-

23,551

23,551Other Retail

10,913

13,3876,580

303

31,183Specialised Lending

11,922

15,4073,550

4230,921

Total exposures

159,716

164,730

235,73953,087613,272

Mar 11< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

84,032

76,952

19,28979

180,352

Sovereign

19,111

14,5653,301-

36,977

Bank

17,96016,844170-

34,974

Residential Mortgage

1,985

4,190

193,177

28,461

227,813

Portfolio Type

Qualifying Revolving Retail

-

-

-

22,811

22,811Other Retail

9,962

13,1086,137

620

29,827

Specialised Lending

10,60415,3043,255

44

29,207

Total exposures

143,654

140,963

225,32952,015561,961

Sep 10< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

81,51178,00519,746

244

179,506

Sovereign

18,77814,1992,122-

35,099Bank

16,99915,469213-

32,681

Residential Mortgage

1,850

4,210

187,467

28,007

221,534

Portfolio Type

Qualifying Revolving Retail

-

-

-

22,60522,605

Other Retail

9,924

13,051

5,701

718

29,394

Specialised Lending

9,603

14,8333,380

19

27,835

138,665

139,767

218,629

51,593548,654

Total exposures

22

No Maturity Specified predominately includes credit cards and residential mortgage equity manager accounts.

29

ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(f) part (i): Impaired assets23 24, Past due loans25, Provisions and Write-offs by
Industry sector
Sep 11
Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance
$M

-

1,122

174

288

71

17

-

311

29

102

34

18

Construction

-

103

42

49

27

30

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

45

11

19

3

3

-

229

10

40

(17)

14

-

-

-

-

-

-

Manufacturing

-

768

30

132

1

63

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Personal

-

1,012

1,296

525

303

397

35

1,031

113

232

124

116

Retail Trade

-

113

44

63

13

16

Transport & Storage

2

88

14

35

11

12

Wholesale Trade

-

300

23

150

71

13

Other

1

421

48

62

(21)

19

Total

38

5,543

1,834

1,697

620

718

Property Services

Mar 11
Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance
$M

-

1,361

217

245

83

17

-

203

36

87

21

25

Construction

-

128

41

50

12

8

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

46

7

18

2

5

-

303

6

60

33

64

-

-

-

-

-

-

Manufacturing

2

894

27

186

9

24

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Personal

-

990

1,384

541

261

345

31

1,223

96

233

148

161

Retail Trade

-

114

40

64

16

29

Transport & Storage

2

102

40

37

3

6

Wholesale Trade

-

332

21

95

3

5

Other

6

484

40

101

19

14

Total

41

6,180

1,955

1,717

610

703

Property Services

23

Impaired derivatives include a credit valuation adjustment (CVA) of $68 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2011: $71 million; September 2010: $77 million).

24
Impaired loans / facilities include restructured items of $700 million for customer facilities in which the originalcontractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring
may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk (March 2011: $704 million; September 2010: $141
million).
25
Past due loans ≥ 90 days includes $1,593 million well secured loans (March 2011: $1,810 million; September
2010: $1,416 million).

30

ANZ Basel II Pillar 3 disclosure

September 2011

Sep 10Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance
$M

2

1,197

165

217

73

35

-

218

50

102

16

21

Construction

-

98

35

44

23

47

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

49

9

21

5

5

-

448

11

96

23

80

-

-

-

-

-

-

Manufacturing

2

402

22

197

7

31

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Personal

-

1,084

1,057

611

311

341

41

1,831

88

257

179

72

Retail Trade

-

171

37

79

23

12

Transport & Storage

-

80

23

38

10

9

Wholesale Trade

-

353

18

101

13

14

Other

6

578

40

112

61

63

Total

51

6,510

1,555

1,875

744

730

Property Services

Table 4(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs

Sep 11

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

25

2,767

206

611

150

151

Sovereign

-

-

-

-

-

-

Bank

-

83

-

53

32

-

Residential Mortgage

-

599

1,150

189

41

44

Qualifying Revolving Retail

-

-

86

-

130

154

Other Retail

-

341

153

210

150

173

Total Advanced IRB approach

25

3,790

1,595

1,063

503

522

Specialised Lending

13

1,106

75

225

85

114

Portfolios subject to Standardised approach
Corporate

-

388

119

193

6

15

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

26

1

10

5

3

Qualifying Revolving Retail

-

75

7

75

(2)

10

Other Retail

-

158

37

131

23

54

Total Standardised approach

-

647

164

409

32

82

38

5,543

1,834

1,697

620

718

Total

31

ANZ Basel II Pillar 3 disclosure

September 2011

Mar 11

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

22

3,123

186

617

191

263

Sovereign

-

-

-

-

-

-

Bank

-

81

-

17

(8)

-

Residential Mortgage

-

555

1,211

182

23

40

Qualifying Revolving Retail

-

-

93

-

115

135

Other Retail

-

352

160

222

133

142

Total Advanced IRB approach

22

4,111

1,650

1,038

454

580

Specialised Lending

19

1,404

60

252

107

56

Portfolios subject to Standardised approach
Corporate

-

401

195

188

25

2

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

14

2

6

1

-

Qualifying Revolving Retail

-

79

12

84

4

25

Other Retail

-

171

36

149

19

40

Total Standardised approach

-

665

245

427

49

67

41

6,180

1,955

1,717

610

703

Total

Sep 10

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

33

3,331

233

751

209

196

Sovereign

-

-

-

-

-

-

Bank

-

97

-

28

(5)

-

Residential Mortgage

-

574

881

215

65

65

Qualifying Revolving Retail

-

-

84

-

109

134

Other Retail

-

362

139

225

140

156

Total Advanced IRB approach

33

4,364

1,337

1,219

518

551

Specialised Lending

18

1,509

65

214

173

144

Portfolios subject to Standardised approach
Corporate

-

298

97

156

14

1

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

21

3

6

4

-

Qualifying Revolving Retail

-

106

13

106

(3)

7

Other Retail

-

212

40

174

38

27

Total Standardised approach

-

637

153

442

53

35

51

6,510

1,555

1,875

744

730

Total

32

ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(g): Impaired assets26 27 , Past due loans28 and Provisions by Geography

Sep 11

Geographic region
Australia

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance
$M

35

3,457

1,523

908

2,147

New Zealand

-

1,421

242

402

528

Asia Pacific, Europe and America

3

665

69

387

501

38

5,543

1,834

1,697

3,176

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

37

3,899

1,611

938

2,144

New Zealand

2

1,634

246

406

544

Asia Pacific, Europe and America

2

647

98

373

489

41

6,180

1,955

1,717

3,177

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Total

Mar 11

Geographic region

Total

Sep 10Geographic region
Australia

51

4,232

1,234

977

2,021

New Zealand

-

1,582

238

469

612

Asia Pacific, Europe and America

-

696

83

429

520

51

6,510

1,555

1,875

3,153

Total

26

Impaired derivatives include a credit valuation adjustment (CVA) of $68 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2011: $71 million; September 2010: $77 million).

27
Impaired loans / facilities include restructured items of $700 million for customer facilities in which the originalcontractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring
may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk (March 2011: $704 million; September 2010: $141
million).
28
Past due loans ≥ 90 days includes $1,593 million well secured loans (March 2011: $1,810 million; September
2010: $1,416 million).

33

ANZ Basel II Pillar 3 disclosure

September 2011

Table 4(h): Reconciliation of changes in Provisions29
Half year
Sep 11$M

Half year
Mar 11$M

Half year
Sep 10$M

Balance at start of period

3,177

3,153

3,037

Charge to income statement

(58)

65

(40)

-

-

191

57

(41)

(35)

3,176

3,177

3,153

1,717

1,875

1,593

599

594

744

-

-

355

Adjustments for exchange rate fluctuations

51

(43)

(68)

Discount unwind

(82)

(103)

(104)

Bad debts written-off

(718)

(703)

(730)

Recoveries of amounts previously written off

130

97

85

Total Individual Provision

1,697

1,717

1,875

Total Provisions for Credit Impairment

4,873

4,894

5,028

Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

375

2,801

3,176

Individual Provision

1,697

-

Collective Provision

Provisions acquired
Adjustments for exchange rate fluctuations
Total Collective Provision

Individual Provision
Balance at start of period
Charge to income statement for loans and advances
Provisions acquired

Specific Provision Balance and General Reserve for Credit Losses30

Sep 11

Total Provision for Credit Impairment

1,697
4,873

Mar 11
Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

271

2,906

3,177

Individual Provision

1,717

-

Total Provision for Credit Impairment

1,717
4,894

Sep 10Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

233

2,920

3,153

Individual Provision

1,875

-

Total Provision for Credit Impairment

1,875
5,028

29

Charge to income statement for loans and advances do not include Individual Provision charge related to
impairment on Available-For-Sale assets. Individual Provision charge on impairment on Available-For-Sale assets is
included in Adjustments for exchange rate fluctuations (September 2011: $21 million; March 2011: $16 million;
September 2010: $1 million).

30
There is a difference in the split between ANZ’s Individual Provision and Collective Provision for accounting
purposes and Specific Provision balance and General Reserve for Credit Losses (GRCL) for regulatory purposes, due
to definitional differences. This difference does not impact total provisions, and essentially relates to the classificationof collectively assessed provisions on defaulted accounts. The disclosures in this document are based on Individual
Provision and Collective Provision, for ease of comparison with ANZ’s other published results.

34

ANZ Basel II Pillar 3 disclosure

Table 5September 2011

Credit risk – Disclosures for portfolios subject to theStandardised approach and supervisory risk weighting in the
IRB approach

Use of external rating agencies (External Credit Assessment Institutions)
ANZ has not used external ratings as an input into risk weighting for portfolios under the Standardised
approach, as these are mainly Retail portfolios and hence are not rated by external rating agencies.

Table 5(b): Exposure at Default by risk bucket

Risk weightSep 11$M

Standardised approach exposures

Mar 11$M

Sep 10
$M

0%

-

-

-

20%

4

2

3

35%

1,939

1,148

1,177

50%

61

-

292

75%

68

-

1

100%

26,43924,36824,239

150%

84

156

2

>150%

-

-

-

Capital deductions

-

-

-

28,59425,67425,714

Total
Other Asset exposures
0%

-

20%

1,431

1,746

1,625

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

3,237

3,520

3,510

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

4,668

5,266

5,135

0%

1,508

1,500

1,660

70%

10,221

9,218

6,993

90%

13,211

12,27912,026

115%

4,623

4,615

5,189

250%

1,358

1,595

1,968

Total

30,921

29,207

27,836

Total-

Specialised Lending exposures

Equity exposures
300%

1

2

-

400%

349

407

394

Total

350

409

394

35

ANZ Basel II Pillar 3 disclosure

Table 6

September 2011

Credit risk – Disclosures for portfolios subject to Advanced
IRB approaches

Portfolios subject to the Advanced IRB (AIRB) approach
The following table summarises the types of borrowers and the rating approach adopted within each ofof ANZ’s AIRB portfolios:
IRB Asset Class

Borrower Type

Rating Approach

Corporate

Corporations, partnerships or proprietorships that do
not fit into any other asset class

AIRB

Sovereign

Central governments
Central banks
Certain multilateral development banks

AIRB

Bank

Banks31
In Australia only, other authorised deposit-taking
institutions (ADI) incorporated in Australia

AIRB

Residential
Mortgages

Exposures secured by residential property

AIRB

Qualifying Revolving
RetailConsumer credit cards <$100,000 limit

AIRB

Other Retail

Small business lending
Other lending to consumers

AIRB

Specialised Lending

Income Producing Real Estate32
Project financeObject finance

AIRB – Supervisory
Slotting33

EquityOther Assets

AIRB – fixed risk
weights
All other assets not falling into the above classes e.g.
margin lending, fixed assets

AIRB – fixed risk
weights

In addition, ANZ has applied the Standardised approach to some portfolio segments (mainly retail andlocal corporates in Asia Pacific) where currently available data does not enable development ofadvanced internal models for PD, LGD and EAD estimates. Under the Standardised approach,exposures are mapped to several regulatory risk weights, mainly based on the type of counterparty
and its external rating.
ANZ applies its full normal risk measurement and management framework to these segments forinternal management purposes, such as for economic capital. Standardised segments will be migrated
to AIRB if they reach a volume that generates sufficient data for development of advanced internal
models.
ANZ has not applied the Foundation IRB approach to any portfolios.
The ANZ rating system
As an AIRB bank, ANZ’s internal models generate the inputs into regulatory capital adequacy todetermine the risk weighted exposure calculations for both on and off-balance sheet exposures,
including undrawn portions of credit facilities, committed and contingent exposures and EL
calculations. ANZ’s internal models are used to generate the three key risk components that serve as
inputs to the IRB approach to credit risk:•

PD is an estimate of the level of the risk of borrower default. Borrower ratings are derived by wayof rating models used both at loan origination and for ongoing monitoring.

•

EAD is defined as the expected facility exposure at the date of default.

31

The IRB asset classification of investment banks is Corporate, rather than Bank.

32

Since 2009, APRA has agreed that some large, well-diversified commercial property exposures may be treated as
Corporate exposures, in line with the original Basel Committee’s definition of Specialised Lending.

33

ANZ uses an internal assessment which is mapped to the appropriate Supervisory Slot.

36

ANZ Basel II Pillar 3 disclosure•

September 2011

LGD is an estimate of the potential economic loss on a credit exposure, incurred as aconsequence of obligor default and expressed as a percentage of the facility’s EAD. Whenmeasuring economic loss, all relevant factors are taken into account, including material effects ofthe timing of cash flows and material direct and indirect costs associated with collecting on the
exposure, including realisation of collateral.

Effective maturity is also calculated as an input to the risk weighted exposure calculation for bank,sovereign and corporate IRB asset classes.
ANZ’s rating system has two separate and distinct dimensions that:•

Measure the PD, which is expressed by the Customer Credit Rating (CCR), reflecting the ability toservice and repay debt.

•

Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI iscalculated by reference to the percentage of loan covered by security which can be realised in theevent of default. This calculation uses standard ratios to adjust the current market value ofcollateral items to allow for historical realisation outcomes. The security-related SIs aresupplemented with a range of other SIs which cover such factors as cash cover, mezzanine
finance, intra-group guarantees and sovereign backing as ANZ’s LGD research indicates thatthese transaction characteristics have different recovery outcomes. ANZ’s LGD also includes
recognition of the different legal and insolvency regimes in different countries, where this has
been shown to influence recovery outcomes.

ANZ’s corporate PD master scale is made up of 27 rating grades. Each level/grade is separately
defined and has a range of default probabilities attached to it. The PD master scale enables ANZ’s
rating system to be mapped to the gradings of external rating agencies, using the PD as a common
element after ensuring that default definitions and other key attributes are aligned. The following tabledemonstrates this alignment (for one year PDs):

ANZ CCR

Moody’sStandard & Poor’s

PD Range

0+ to 1-

Aaa to < A1

AAA to < A+

0.0000 - 0.0346%

2+ to 3+

A1 to < Baa2

A+ to < BBB

0.0347 - 0.1636%

3= to 4=

Baa2 to < Ba1

BBB to < BB+

0.1637 - 0.5108%

4- to 6-

Ba1 to < B1

BB+ to < B+

0.5109 - 3.4872%

7+ to 8+

B1 to < Caa

B+ to < CCC

3.4873 - 10.0928%

8=

Caa

CCC

10.0929 - 99.9999%

8-, 9 and 10

Default

Default

100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PD,
so the PD master scale gives ANZ a common language to understand and manage credit risk. For
retail asset class exposures, the LGD dimension is recognised through the process of pooling retail
exposures into homogenous groups.
ANZ also uses specialised PD master scale/mappings for the sovereign and bank asset classes, based
predominantly on the corporate master scale.
Use of internal estimates other than for regulatory capital purposes
ANZ’s rating system is a fundamental part of credit management and plays a key role in:•Lending discretions.

•

Minimum origination standards.

•

Concentration limits.

•

Portfolio reporting.

•Customer profitability measurement.

•Collective provision measurement.

•

Management of deteriorating customers (where certain CCR/SI combinations trigger increasing
scrutiny).

•

Pricing decisions.

PD, LGD and EAD are used in the calculation of economic capital and in the collective provisioning
process. Regulatory and economic capital are calculated from the same data sources and starting fromthe same basis, however there are some differences between the factors used because several
aspects of ANZ’s rating system are adjusted in accordance with APRA requirements for regulatory
capital purposes. The most significant of these adjustments are the use for regulatory capital purposes

37

ANZ Basel II Pillar 3 disclosure

September 2011of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australian residential
real estate and the mandatory use of the supervisory slotting approach for project finance and mostcommercial real estate exposures.
Controls surrounding the ratings system
ANZ’s rating system and credit risk estimates are governed by the Board Risk Committee and several
executive management committees, and are underpinned by a comprehensive framework of controlsthat operate throughout ANZ. All policies, methodologies, model designs, model reviews, validations,
responsibilities, systems and processes supporting the ratings systems are documented, and subject
to review by Internal Audit.
The design, build and implementation of credit rating models resides with a specialist Group-levelteam. The use (including overrides) and performance of credit rating models is monitored by therelevant business and their counterparts in Risk, and validated annually by a separate specialist
Group-level function. This cycle of design, build, implementation, monitoring and validation isoverseen by the CRSOC, and informs the need for new models or recalibration of existing models.
Risk grades are an integral part of reporting to the Board and executives.
In addition, the use of the rating system’s outputs in key business unit performance measures inprocesses such as provisioning and the allocation of economic capital ensures that the rating system
receives robust input from the business units, not just the specialist modelling areas.
Rating process by asset class
Building reliable and accurate rating tools requires balancing of many factors including data availability(external data may be used in some circumstances, where it is relevant), the size of the segment (themore customers within the segment, the more likely that statistically reliable models can be built),
and the need to be able to validate the model. Rating tool approaches include:•

Statistical models producing a PD or a LGD, which are developed from internal or external data on
defaults.

•

Statistical models producing an internal rating, which involve calibrating ANZ’s models to externalrating data where data on defaults is insufficient for statistical purposes (such as banks).

•

Hybrid statistical and expert models producing an internal rating, which use a mixture of default
data and expert input.

•

Expert models/processes that produce an internal rating, including external rating agency
replication models.

Ongoing data collection and testing processes ensure enhanced or new models are introduced as
required to maintain and improve the accuracy and reliability of rating processes.
Regardless of what credit risk rating tool is used, lending staff rating a customer are required toreview the model-generated PD (or CCR) and take into account any out-of-model factors or policy
overlays to decide whether or not to override the model rating. Overrides of a rating model to abetter rating require approval from the independent credit risk function. The significance of the model
for risk grading varies with the customer segment: models will dominate risk grading of homogenous,
simple and data-rich segments such as in Retail, however for complex, specialised business segments
expert knowledge and the highly customised nature of transactions will influence the rating outcome.

38

ANZ Basel II Pillar 3 disclosure

September 2011

The following table summarises the types of internal rating approaches used in ANZ:IRB Asset Class

Borrower type

Rating Approach

Corporate

Corporations,partnerships
orproprietorships that do not fit into any otherasset class

Mainly statistical models
Some use of expert models andpolicy processes

Sovereign

Central governments
Central banks
Certain multilateral development banks

External rating
judgement

Bank

Banks
In Australia only, other ADIs incorporated inAustralia

Statistically-based models
Review of all relevant andmaterial information including
external ratings

Residential
Mortgages

Exposures secured by residential property

Statistical models

Qualifying Revolving
RetailConsumer credit cards <$100,000 limit

Statistical models

Other Retail

Small business lending
Other lending to consumers

Statistical models

Specialised Lending

Income Producing Real Estate
Project financeObject financeSupervisory Slotting34

andexpert

For the Retail Basel asset class (Residential Mortgages, Qualifying Revolving Retail and Other Retail
Exposures) the large number of relatively homogenous exposures enable the development ofstatistically robust application scoring models for use at origination and behavioural scoring forongoing management. The scores are calibrated to PD, so the PD master scale gives ANZ a common
language to understand and discuss credit risk. LGD is recognised through the process of pooling retail
exposures into homogenous groups.
Estimation of LGD and EAD
ANZ’s LGD modelling takes into account data on secured recovery, unsecured recovery rates and debt
seniority, geography and internal management costs from several major data sources. Internal data isused as the basis for LGD estimation in the retail asset class, and is supplemented by external data forthe corporate asset class. Given the scarcity of internal data for Bank and Sovereign Basel asset
classes, LGD modelling for these classes is primarily based on external data.
EAD represents the expected facility exposure at the date of default, including an estimate ofadditional drawings prior to default, as well as post-default drawings that were legally committed toprior to default.

34
Specialised Lending exposures are rated with internal rating tools to produce a PD and LGD. These are used ininternal processes, but not for regulatory capital purposes where the exposures are mapped to Supervisory Slots.

39

ANZ Basel II Pillar 3 disclosure

September 2011

Table 6(d): Non Retail Exposure at Default subject to Internal Ratings Based (IRB)
approach35 36 37

Sep 11
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

7,201

40,33056,956

58,128

5,276

1,897

3,457

173,245

SovereignBank

46,017

2,772

40

3,343

366

-

2

52,54033,733

2,988

4,267

1,171

2

80

67

42,308

Total

86,95146,09061,26362,642

5,644

1,977

3,526

268,093

32.4%

17.2%

22.9%

23.4%

2.1%

0.7%

1.3%

100.0%

Undrawn commitments (included in above)
2,296
19,103
Corporate

Exposure at Default% of Total

17,295

10,118

490

196

125

49,623

962

208

7

38

2

-

-

1,217

217

66

80

13

-

1

-

377

3,475

19,377

17,382

10,169

492

197

125

51,217

Average Exposure at Default
0.527
Corporate

Sovereign
Bank
Total

Sovereign
Bank

1.017

0.378

0.218

0.460

0.244

0.797

0.275

13.725

6.688

0.728

6.182

16.718

-

0.149

7.610

0.665

0.857

2.367

1.472

0.051

14.973

1.868

0.615

46.9%

Exposure-weighted average Loss Given Default (%)
Corporate
Sovereign

56.9%

60.9%

48.4%

35.8%

40.7%

46.0%

33.6%

2.7%

5.3%

27.6%

55.3%

40.7%

-

54.8%

6.4%

Bank

62.4%

64.2%

65.2%

65.3%

35.0%

69.9%

64.2%

62.9%

Exposure-weighted average risk weight (%)
15.8%
37.9%
Corporate

61.3%

Sovereign
Bank

54.7%

70.4%

130.0%

215.7%

193.5%

0.4%

1.9%

35.3%

109.1%

124.5%-

724.5%

8.3%

14.1%

19.3%

59.0%

105.8%

115.0%

326.6%

160.5%

22.4%

35

In accordance with APS 330, EAD in Table 6(d) includes Advanced IRB exposures; however does not include
Specialised Lending, Standardised, Securitisation, Equities or Other Assets exposures. Specialised Lending is
excluded from Table 6(d) as it follows the Supervisory Slotting treatment, and a breakdown of risk weightings isprovided in Table 5(b).

36

Average EAD is calculated as total EAD divided by the total number of credit risk generating exposures.

37

Exposure-weighted average risk weight (%) is calculated as RWA divided by EAD.

40

ANZ Basel II Pillar 3 disclosure

September 2011

Mar 11
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

6,079

36,01948,97855,696

5,883

2,551

3,706

158,912

Sovereign

32,441

1,796

67

2,443

228

-

2

36,977

Bank

28,537

3,450

2,230

637

3

3

114

34,974

Total

67,05741,26551,27558,776

6,114

2,554

3,822

230,863% of Total

29.0%

17.9%

22.2%

25.5%

2.6%

1.1%

1.7%

100.0%

Exposure at Default

Undrawn commitments (included in above)
Corporate

1,949

15,253

15,180

9,493

481

326

113

42,795

Sovereign
Bank

913

117

20

40

4

-

-

1,094

190

16

60

11

-

-

-

277

3,052

15,386

15,260

9,544

485

326

113

44,166

Corporate

0.643

1.012

0.361

0.199

0.404

0.332

0.800

0.241

Sovereign
Bank

9.492

5.183

0.594

4.271

15.475

-

0.145

4.902

0.615

0.957

1.824

0.601

0.045

0.114

3.093

0.578

45.8%

Total
Average Exposure at Default

Exposure-weighted average Loss Given Default (%)
Corporate
Sovereign

57.3%

60.1%

46.6%

35.8%

40.8%

46.2%

36.3%

2.5%

4.3%

30.9%

53.7%

40.8%

-

59.0%

6.2%

Bank

62.2%

61.3%

63.6%

63.9%

34.1%

66.7%

64.8%

62.2%

Exposure-weighted average risk weight (%)
16.5%
36.0%
Corporate

61.9%

Sovereign
Bank

51.5%

70.6%

128.7%

215.2%

183.6%

0.4%

1.4%

49.5%

111.1%

131.7%-

781.8%

8.7%

14.3%

19.2%

58.9%

111.2%

123.1%

311.8%

156.0%

19.9%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Sep 10

Exposure at Default
Corporate
Sovereign

6,423

30,304

48,33559,584

6,611

2,951

4,015

158,223

30,545

2,271

40

1,981

260

-

2

35,099Bank

28,084

2,365

1,505

610

10

13

94

32,681

Total

65,052

34,94049,88062,175

6,881

2,964

4,111

226,003% of Total

28.8%

15.5%

22.1%

27.5%

3.0%

1.3%

1.8%

100.0%

Undrawn commitments (included in above)
Corporate
Sovereign

1,455

15,973

15,872

10,690

666

339

159

45,154

952

167

4

39

1

-

-

1,163

Bank

76

17

35

51

-

-

-

179

Total

2,483

16,157

15,911

10,780

667

339

159

46,496

Average Exposure at Default
Corporate
Sovereign
Bank

0.675

1.003

0.300

0.253

0.415

0.323

0.772

0.274

11.458

6.774

0.882

4.371

29.044

-

0.153

6.404

0.621

0.950

1.913

0.511

0.143

38.725

7.831

0.532

45.6%

Exposure-weighted average Loss Given Default (%)
Corporate

59.2%

59.6%

46.4%

37.3%

40.5%

44.5%

39.5%

Sovereign

2.6%

4.9%

38.2%

54.9%

42.3%

-

59.0%

6.1%

Bank

62.7%

64.0%

63.7%

54.9%

61.4%

66.5%

64.2%

62.7%

Exposure-weighted average risk weight (%)
18.4%
34.4%
Corporate

64.4%

Sovereign
Bank

50.4%

75.1%

129.2%

208.1%

162.3%

0.4%

2.0%

60.8%

110.4%

126.3%-

781.7%

7.7%

13.8%

21.9%

58.9%

105.7%

205.6%

324.5%

160.5%

18.8%

41

ANZ Basel II Pillar 3 disclosure

September 2011

Table 6(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB)
approach by risk grade
Sep 11
0.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.00%
$M
$M
$M

Residential Mortgage

4,685

152,771

19,36244,367

7,035

Qualifying Revolving Retail
Other Retail

10,800

319

1,884

4,956

2,069

38

3,669

1,452

17,359Total

15,523

156,759

22,698

5.4%

54.9%

Default
$M

Total
$M

4,765

1,897

234,882

1,035

156

21,219

5,429

890

726

29,563

66,682

14,533

6,690

2,779

285,664

7.9%

23.3%

5.1%

2.3%

1.0%

100.0%

Exposure at Default% of Total

Undrawn commitments (included in above)
Residential Mortgage

576

18,062

1,286

3,296

291

279

4

23,794

8,374

318

1,208

2,120

576

114

17

12,727

35

2,593

905

2,670

275

67

4

6,548

8,985

20,973

3,398

8,086

1,141

461

25

43,069Residential Mortgage
Qualifying Revolving Retail

0.102

0.223

0.182

0.180

0.187

0.175

0.256

0.193

0.011

0.006

0.010

0.009

0.008

0.008

0.008

0.010

Other Retail

0.006

0.010

0.012

0.014

0.009

0.007

0.034

0.012

Exposure-weighted average Loss Given Default (%)
22.9%
20.2%
21.4%
Residential Mortgage

Qualifying Revolving Retail
Other Retail
Total
Average Exposure at Default

Qualifying Revolving Retail
Other Retail

20.7%

20.4%

20.6%

21.3%

20.4%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

72.1%

61.4%

56.0%

44.5%

51.6%

65.2%

57.8%

49.4%

Exposure-weighted average risk weight (%)
Residential Mortgage
Qualifying Revolving Retail

5.1%

6.9%

14.6%

27.8%

74.6%

113.2%

238.9%

17.5%

4.7%

11.1%

13.8%

38.5%

104.8%

205.4%

294.2%

35.2%

Other Retail

18.1%

29.0%

38.3%

58.1%

81.3%

158.4%

236.5%

65.1%

42

ANZ Basel II Pillar 3 disclosure

September 2011

Mar 11
0.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.00%
$M
$M
$M

Default
$M

Total
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

4,200

149,533

17,36842,250

6,851

4,566

1,891

226,659

10,723

300

1,865

4,769

2,131

1,071

161

21,020

39

3,502

1,407

16,667

5,255

951

717

28,538

14,962

153,335

20,64063,686

14,237

6,588

2,769

276,217

5.4%

55.5%

7.5%

23.1%

5.2%

2.4%

1.0%

100.0%

Undrawn commitments (included in above)
Residential Mortgage

535

17,307

1,773

2,715

271

234

9

22,844

8,327

299

1,195

2,086

597

120

15

12,639

35

2,449

871

2,306

254

67

3

5,985

8,897

20,055

3,839

7,107

1,122

421

27

41,468Residential Mortgage

0.095

0.210

0.155

0.182

0.184

0.170

0.240

0.186

Qualifying Revolving Retail

0.011

0.006

0.010

0.009

0.008

0.007

0.008

0.010

Other Retail

0.007

0.010

0.012

0.014

0.009

0.007

0.030

0.012

Exposure-weighted average Loss Given Default (%)
22.7%
20.2%
20.4%
Residential Mortgage

Qualifying Revolving Retail
Other Retail
Total
Average Exposure at Default

Qualifying Revolving Retail
Other Retail

20.8%

20.3%

20.6%

21.3%

20.4%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

72.0%

60.3%

55.5%

44.0%

51.6%

65.3%

58.0%

49.1%

Exposure-weighted average risk weight (%)
Residential Mortgage
Qualifying Revolving Retail

4.9%

7.0%

15.0%

28.7%

74.1%

112.7%

240.8%

17.7%

4.7%

11.0%

13.6%

37.8%

105.8%

205.3%

317.7%

35.9%

Other Retail

17.6%

28.0%

37.7%

57.3%

81.2%

157.8%

229.0%

64.8%

0.00%
<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.00%
$M
$M
$M

Default
$M

Total
$M

Sep 10

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

4,152

143,452

16,81743,586

6,174

4,294

1,581

220,056

10,596

290

1,925

4,901

1,953

958

141

20,764

37

3,439

1,377

16,781

5,133

877

639

28,283

14,785

147,181

20,11965,26813,260

6,129

2,361

269,103

5.5%

54.7%

7.5%

24.3%

4.9%

2.3%

0.9%

100.0%

Undrawn commitments (included in above)
Residential Mortgage
Qualifying Revolving Retail523

16,527

1,705

2,859

249

219

9

22,091

8,248

289

1,265

2,243

600

112

14

12,771

34

2,430

880

2,328

255

62

2

5,991

Total

8,805

19,246

3,850

7,430

1,104

393

25

40,853

Average Exposure at Default
Residential Mortgage

0.100

0.206

0.155

0.182

0.180

0.166

0.255

0.183

0.011

0.006

0.010

0.009

0.008

0.007

0.008

0.010

0.006

0.010

0.011

0.014

0.009

0.007

0.035

0.012

Other Retail

Qualifying Revolving Retail
Other Retail

Exposure-weighted average Loss Given Default (%)
Residential Mortgage

22.7%

20.2%

20.4%

20.8%

20.3%

20.6%

21.6%

20.4%

Qualifying Revolving Retail

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

72.2%

62.0%

56.6%

44.7%

48.4%

65.5%

56.5%

49.0%

Exposure-weighted average risk weight (%)
4.9%
7.1%
Residential Mortgage
Qualifying Revolving Retail
Other Retail

15.1%

28.7%

74.6%

113.6%

239.8%

17.6%

4.8%

11.3%

14.0%

38.7%

106.5%

205.7%

316.7%

34.7%

18.4%

28.6%

38.2%

58.3%

76.4%

159.4%

199.4%

63.3%

43

ANZ Basel II Pillar 3 disclosure

September 2011

Table 6(e): Actual Losses by portfolio type
Half year Sep 11
Individual provision charge$M

Write-offs$M

Corporate

150

151

Sovereign--

Basel Asset Class

Bank

32

-

Residential Mortgage

41

44

Qualifying Revolving Retail

130

154

Other Retail

150

173

Total Advanced IRB

503

522

Specialised Lending

85

114

Standardised approach

32

82

620

718

Total

Half year Mar 11
Individual provision charge$M

Write-offs$M

Corporate

191

263

Sovereign--

Basel Asset Class

Bank

(8)

-

Residential Mortgage

2340

Qualifying Revolving Retail

115

135

Other Retail

133

142

Total Advanced IRB

454

580

Specialised Lending

107

56

Standardised approach
Total

49

67

610

703

Half year Sep 10
Individual provision charge$M

Write-offs$M

Corporate

209

196

Sovereign--

Basel Asset Class

Bank

(5)

-

Residential Mortgage

65

65

Qualifying Revolving Retail

109

134

Other Retail

140

156

Total Advanced IRB

518

551

Specialised Lending

173

144

Standardised approach

53

35

744

730

Total

44

ANZ Basel II Pillar 3 disclosure

September 2011

Table 6(f): Analysis of expected versus actual losses by portfolio typeSep 10One yearregulatory expected
loss estimate$M

Sep 11
Actual losses
for 12 months(Write-offs)$M

Corporate

1,453

414

Sovereign

21

-

Bank

22

-

Residential Mortgage

593

84

Qualifying Revolving Retail

404

289

Other Retail

805

315

Specialised Lending

1,257

170

Total Advanced IRB and Specialised Lending

4,555

1,272

Mar 10One yearregulatory expected
loss estimate$M

Mar 11
Actual losses
for 12 months(Write-offs)$M

Corporate

1,522

460

Sovereign

20

-

Bank

22

-

Residential Mortgage

587

105

Qualifying Revolving Retail

420

269

Other Retail

815

298

Specialised Lending

1,301

200

Total Advanced IRB and Specialised Lending

4,687

1,332

Sep 09One yearregulatory expected
loss estimate$M

Sep 10
Actual losses
for 12 months(Write-offs)$M

Corporate

1,644

636

Sovereign

7

-

Bank

58

8

Residential Mortgage

561

117

Qualifying Revolving Retail

396

262

Other Retail

813

330

Specialised Lending

1,050

280

Total Advanced IRB and Specialised Lending

4,529

1,633

The regulatory EL shown above represents estimated credit loss from defaults over a one-year horizon(computed as the product of PD, EAD and LGD) plus the individual provision balance. The actual loss
measures are write-offs for the following year. While these metrics provide some insight into thepredictive accuracy of estimations and calculations underpinning ANZ’s regulatory EL, any comparison
has limitations due to definitional differences e.g.:•

The parameters PD, EAD and LGD underlying the regulatory EL calculation represent estimates
based on APRA requirements which include the use of a downturn LGD floor of 20% formortgages, and supervisory slotting approach for project finance, object finance and nondiversified real estate. Regulatory EL also includes the individual provision balance on defaulted
exposures.

•

Regulatory EL is a measure of expected credit losses at the start of the year, whereas write-offs
relate to a fluctuating portfolio and are recorded throughout the year.

•

There is typically a time lag between default and write-offs representing the workout period
where recovery options are identified and pursued.

45

ANZ Basel II Pillar 3 disclosure

Table 7

September 2011

Credit risk mitigation disclosures

Main types of collateral taken by ANZ
Collateral is used to mitigate credit risk, as the secondary source of repayment in case thecounterparty cannot meet its contractual repayment obligations38. Types of collateral typically taken
by ANZ include:•

Security over residential, commercial, industrial or rural property.

•

Fixed and floating charges over business assets.

•

Security over specific plant and equipment.

•

Charges over listed shares, bonds or securities.

•

Charges over cash deposits.

•

Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound or by the nature of
the product (for instance, small limit products such as credit cards), a transaction may not be
supported by collateral.
Credit policy and processes set out the acceptable types of collateral, as well as a process by which
additional instruments and/or asset types can be considered for approval. ANZ’s credit risk modellingareas use historical internal loss data and other relevant external data to assist in determining thediscount that each type would be expected to incur in a forced sale. The discounted value is used in
the determination of a SI for LGD purposes.
Policies and processes for collateral valuation and management
ANZ has well established policies and processes around collateral valuation and management. The
concepts of legal enforceability, certainty and current valuation are central to collateral management.
In order to achieve legal enforceability and certainty, ANZ uses standard collateral instruments or has
specific documentation drawn up by external legal advisers, and where applicable, security interests
are registered. The use of collateral management systems also provides certainty that the collateral
has been properly taken, registered and stored.
In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules aroundacceptable types of valuations (including who may value an asset), the frequency of revaluations andstandard extension ratios for typical asset types. Upon receipt of a new valuation, the information isused to recalculate the SI (or to reassess the adequacy of the provision, in the case of an impaired
asset), thereby ensuring that the exposure has an updated LGD attached to it for risk quantification
purposes.
Guarantee support
Guarantee support for lending proposals are an integral component in transaction structuring for ANZ.
The guarantee of a financially strong party can help improve the PD of a transaction through its
explicit support of the weaker rated borrower.
Guarantees that are recognised for risk rating purposes may be provided by parties that include
associated entities, banks, sovereigns or individuals. Credit policy provides threshold parameters todetermine acceptable counterparties in achieving risk grade enhancement of the transaction.
The suitability of the guarantor is determined by risk rating that guarantor. Not all guarantees orguarantors are recognised for risk grade enhancement purposes.
Use of credit derivatives for risk mitigation
ANZ uses purchased credit derivatives to mitigate credit risk by lowering exposures to reference
entities that generate high concentration risk exposures or to improve risk return performance.

38
For some products, the collateral provided is fundamental to its structuring so is not strictly the secondary sourceof repayment. For example, lending secured by trade receivables is typically repaid by the collection of thosereceivables.

46

ANZ Basel II Pillar 3 disclosure

September 2011

Only certain credit derivatives such as credit default swaps (CDS) are recognised for risk mitigation
purposes in the determination of regulatory capital. A CDS entails the payment by one party inexchange for credit default protection payment if a credit default event on a reference asset occurs.
Standard, legally enforceable documentation applies.
For regulatory capital purposes, ANZ only recognises protection using credit derivatives where theymeet several policy and regulatory requirements around the strength of the protection offered such as
being irrevocable.
A CDS may only be transacted with banks, ANZ-related conduits and non-bank financial institutions
that have been credit assessed and approved by a designated specialist credit officer. All parties mustmeet minimum credit standards and be allocated a related credit limit. In the event that thecreditworthiness of a credit protection provider falls below the minimum required to provide effective
protection, the protection is no longer recognised as an effective risk mitigant for regulatory purposes.
The use of netting
Netting is a form of credit risk mitigation in that it reduces EAD, by offsetting a customer’s positive
and negative balances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented with thecustomer and meet a number of legally enforceable requirements.
Netting is also used where the credit exposure arises from off balance sheet market relatedtransactions. For close-out netting to be utilised with counterparties, a legally enforceable eligible
netting agreement in an acceptable jurisdiction must be in place. This means that each transaction isaggregated into a single net amount and transactions are netted to arrive at a single overall sum.
Transaction structuring to mitigate credit risk
Besides collateral, guarantee support and derivatives described above, credit risk mitigation can also
be furthered by prudent transaction structuring. For example, the risk in project finance lending canbe mitigated by lending covenants, loan syndication and political risk insurance.
Concentrations of credit risk mitigation
Taking collateral raises the possibility that ANZ may inadvertently increase its risk by becoming
exposed to collateral concentrations. For example, in the same way that an over-exposure to aparticular industry may mean that a bank is more sensitive to the fortunes of that industry, an overexposure to a particular collateral asset type may make ANZ more sensitive to the performance ofthat asset type.
ANZ does not believe that it has any material concentrations of collateral types, given the welldiversified nature of its portfolio and conservative asset extension ratios.

47

ANZ Basel II Pillar 3 disclosure

September 2011

Table 7(b): Credit risk mitigation on Standardised approach portfolios – collateral39

Sep 11

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

23,353866-

22,487

3.7%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential Mortgage

2,155

-

-

2,155

0.0%

Qualifying Revolving Retail

2,332

-

-

2,332

0.0%

Other Retail

1,621

1

-

1,620

0.0%

29,461867-

28,594

2.9%

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

22,216776-

21,440

3.5%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

1,154

-

-

1,154

0.0%
0.0%

Standardised approach

Total

Mar 11

Standardised approach

Residential Mortgage
Qualifying Revolving Retail

1,791

-

-

1,791

Other Retail

1,290

1

-

1,289

0.1%

26,451

777-

25,674

2.9%

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

22,050768-

21,282

3.5%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

1,479

-

-

1,479

0.0%

Qualifying Revolving Retail

1,841

-

-

1,841

0.0%

Other Retail

1,112

-

-

1,112

0.0%

26,482768-

25,714

2.9%

Total

Sep 10Standardised approach

Residential Mortgage

Total

39
Eligible Collateral can include cash collateral (cash, certificates deposits and bank bills issued by the lending ADI),
gold bullion and highly rated debt securities.

48

ANZ Basel II Pillar 3 disclosure

September 2011

Table 7(c): Credit risk mitigation – guarantees and credit derivatives40

Sep 11

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M

Advanced IRB
Corporate (incl. Specialised
Lending)
Sovereign

206,904

14,844126

204,166

7.2%

45,967108-

52,5400.2%

Bank46,2694,336-

42,308

9.4%

Residential Mortgage

234,882--

234,882

0.0%

Qualifying Revolving Retail21,219--21,2190.0%

Other Retail29,563--29,5630.0%

584,804

19,288

126584,678

3.3%

Corporate

22,487--22,487

0.0%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential Mortgage

2,155

-

-

2,155

0.0%

Qualifying Revolving Retail

2,332

-

-

2,332

0.0%

Other Retail

1,620

-

-

1,620

0.0%

28,594--28,5940.0%

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M

Advanced IRB
Corporate (incl. Specialised
Lending)
Sovereign

190,749

13,634

140

188,119

30,37674-

36,9770.2%

Bank39,084

4,352-

34,974

11.1%

Residential Mortgage

226,660--

226,659

0.0%

Qualifying Revolving Retail

21,020--21,020

0.0%

Other Retail28,538--28,5380.0%

536,427

18,060140536,287

3.4%

Corporate

21,440--21,440

0.0%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential Mortgage

1,154

-

-

1,154

0.0%

Qualifying Revolving Retail

1,791

-

-

1,791

0.0%

Other Retail

1,289

-

-

1,289

0.0%

25,674--25,674

0.0%

Total

Total Exposure
post Credit Risk
Mitigation$M % Coverage

Standardised approach

Total

Mar 11

Total

Total Exposure
post Credit Risk
Mitigation$M % Coverage

7.2%Standardised approach

Total

40
Table 7(c) shows the exposure amount by asset class gross and net of the impact of guarantees and credit
derivatives.

49

ANZ Basel II Pillar 3 disclosure

September 2011

Sep 10

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M

Advanced IRB
Corporate (incl. Specialised
Lending)
Sovereign

192,037

16,497229

186,059

25,36530-

35,0990.1%

Bank36,666

4,236-

32,681

11.6%

Residential Mortgage

220,055--

220,055

0.0%

Qualifying Revolving Retail

20,764--

20,764

0.0%

Other Retail28,282--28,2820.0%

523,169

20,763229

522,940

4.0%

Corporate

21,282--

21,282

0.0%

Sovereign

-

-

-

-

-

Bank

-

-

-

-

-

Residential Mortgage

1,479

-

-

1,479

0.0%

Qualifying Revolving Retail

1,841

-

-

1,841

0.0%

Other Retail

1,112

-

-

1,112

0.0%

25,714--25,714

0.0%

Total

Total Exposure
post Credit Risk
Mitigation$M % Coverage

8.7%Standardised approach

Total

50

ANZ Basel II Pillar 3 disclosure

Table 8September 2011

General disclosures for derivatives and counterparty credit
riskDefinition of counterparty credit risk
Counterparty credit risk is present in market instruments (derivatives and forward contracts), andcomprises:•

Settlement risk, which arises where one party makes payment or delivers value in the expectation
but without certainty that the counterparty will perform the corresponding obligation in a bilateralcontract at settlement date.

•Market replacement risk (pre-settlement risk), which is the risk that a counterparty will default
during the life of a derivative contract and that a loss will be incurred in covering the position.

ANZ transacts market instruments with the following counterparties:•

End users – would typically use over the counter derivative instruments provided by ANZ tomanage price movement risk associated with their core business activity.

•

Professional counterparties – ANZ may hedge price movement risks by entering into transactions
with professional counterparties that conduct two way (buy and sell) business.

Counterparty credit risk requires a different method to calculate EAD because actual and potential
market movements impact ANZ’s exposure or replacement cost. The markets covered by thistreatment include interest rates, foreign exchange, CDS, equities and commodities.
Counterparty credit risk governance
ANZ’s counterparty credit risk management is governed by its credit principles, policies andprocedures. The Counterparty Credit Risk function is responsible for determining the counterparty
credit risk exposure methodology applied to market instruments, in the framework for counterparty
credit limit management, measurement and reporting. Limits are approved by the appropriate CAD
holder.
Counterparty credit risk measurement and reporting
The general approach is to calculate future exposure as the sum of the mark-to-market value of the
exposure, plus the sum of the notional principal multiplied by the potential credit risk exposure(PCRE).
ANZ measures counterparty credit risk exposure for positive mark-to-market positions i.e. the cost to
ANZ to replace an outstanding contract with counterparty based on its current market value if
counterparty defaulted on its obligations.
PCRE factors recognise that prices may change over the remaining period to maturity, and that risk
decreases as the contract’s remaining term to maturity decreases. In general terms PCRE is calculated
by applying a risk weighting or volatility factor to the face value of the notional principal of individual
trades.
PCRE factors are also used by credit officers when establishing credit limits, to ensure the potential
volatility of the transactions’ values is recognised. Counterparty credit risk is calculated daily andexcesses above approved limits are reported to account controllers and risk officers for action.
Credit valuation adjustment
Over the life of a derivative instrument, ANZ uses a CVA model to adjust fair value to take into
account the impact of counterparty credit quality. The methodology calculates the present value of
expected losses over the life of the financial instrument as a function of PD, LGD, expected credit risk
exposure and an asset correlation factor.
Impaired derivatives are also subject to a CVA.
Wrong way risk
ANZ’s management of counterparty credit risk also considers the possibility of wrong way risk, which
emerges when a counterparty’s PD is adversely correlated with market risk factors. ANZ’s credit
policies and independent transaction evaluation by Credit Risk are central to managing wrong way
risk.

51

ANZ Basel II Pillar 3 disclosure

September 2011

Counterparty credit risk mitigation
ANZ’s primary tools to mitigate counterparty credit risk include:•

A bilateral netting master agreement (e.g. an ISDA) allowing close-out netting of exposures in a
portfolio with offsetting contracts, with a single net payment with the same legal counterparty.

•

Use of collateral agreements in some transactions based on standard market documentation (i.e.
ISDA master agreement with credit support annex) that governs the amount of collateral required
to be posted or received by ANZ throughout the life of the contract. Some agreements are linked
to external credit ratings which means in the event of a party’s (ANZ or a counterparty) externalrating being downgraded, it would likely be required to lodge collateral.

•

Use of right to break clauses in master agreement or in trade confirmation to reduce term of longdated derivative trades.

•

Independent limits setting, credit exposure control, monitoring and reporting of excesses against
approved credit limits.

•

Additional termination triggers (close out of exposure) such as credit rating downgrade clauses
and change in ownership clauses being included in documentation.

•

Linking covenants and events of default in existing loan facility agreement to master agreement.

•

Use of credit derivatives to hedge counterparty credit risk exposure.

•

Settlement through Continuous Linked Settlement (CLS) to eliminate settlement risk for foreignexchange transactions with CLS members.

In the event of a downgrading of ANZ’s rating by one notch from AA to AA-, as at 30 September 2011,
ANZ would have been required to lodge USD145 million additional collateral with its counterparties.

52

ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 6 – Securitisation
Table 9Securitisation disclosures

Definition of securitisation
A securitisation is a financial structure where the cash flow from a pool of assets is used to service
obligations to at least two different tranches or classes of creditors,41 typically holders of debt
securities, with each class or tranche reflecting a different degree of credit risk. This stratification of
credit risk means that one class of creditors is entitled to receive payments from the pool before
another class. Securitisations may be categorised as:•

Traditional securitisations, where legal ownership of the underlying asset pool is transferred into aSpecial Purpose Vehicle (SPV), which finances the purchase by issuing debt instruments (notes)
to investors, with principal and interest paid from realisation of or regular cash flows from theassets. The SPV assets are insulated from bankruptcy of the seller or servicer.

•

Synthetic securitisations, where credit risk is transferred to a third party but legal ownership of
the underlying assets remain with the originator e.g. by using credit derivatives or guarantees.

Regulatory capital approaches used in ANZ’s securitisation activities
For securitisation exposures held in ANZ’s banking book,42 ANZ applies an IRB approach (as outlinedin APS 120) to determine the regulatory capital charge.
Chapter 7 outlines regulatory capital treatment for securitisation exposures held in ANZ’s tradingbook.
Securitisation activities
ANZ’s key securitisation activities are:•Securitisation of ANZ originated assets – use of securitisation as a funding, liquidity and capitalmanagement tool and may or may not involve the transfer of credit risk i.e. may or may notprovide regulatory capital relief.

•

Securitisation of third-party originated assets.

•

Provision of facilities and services to securitisations e.g. liquidity, funding derivatives and/or credit
support, structuring and arranging services, conduit management and (via ANZ Capel Court
Limited) trust management services.

•

Investment in securities - ANZ may purchase notes issued from securitisation.

Governance of securitisation activities
Governance of securitisation activities is overseen by the Board and executive committees describedin Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in
Chapters 5 and 7.
Many functions within ANZ are involved in securitisation activities given the range of activities
undertaken and risks that need to be managed. For origination and structuring, ANZ has a specialist
securitisation team with independent risk personnel overseeing operations. Credit decisions requirejoint risk and business approval. The securitisation team must be involved in all non-trading
securitisation transactions across ANZ, which ensures consistent expert treatment.
When ANZ is investing in instruments issued from securitisation programs, the Global Markets
business manages them as they do for any other part of that allocated portfolio.
The revised APS 120 is effective 1 January 2012, and ANZ acknowledges that it will align its
framework to reflect the updated standard.
41
APRA’s definition of securitisation includes certain cases where only one tranche or class of creditors is serviced by
the cash flow from the pool of assets.
42
Exposures are classified into either the trading book or the banking book. In general terms, the trading bookconsists of positions in financial instruments and commodities held with trading intent or in order to hedge otherelements of the trading book, and the banking book contains all other exposures. Banking book exposures are
typically held to maturity, in contrast to the shorter term, trading nature of the trading book.

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Risk measurement and reporting of securitisation exposures
In accordance with APS 120, ANZ has a hierarchy of approaches available to quantify the credit risk ofbanking book securitisation exposures. The most common approach used is the Internal Assessment
Approach, where ANZ uses a rating agency-type methodology which takes into account historicalperformance of assets and other (asset-specific) considerations such as underwriting standards.
A conservative LGD and EAD is applied to this rating for economic capital.
All facilities provided to or investments in securitisation programs are reviewed at least annually,
including the risk grade. ANZ undertakes its own internal risk assessments for securitisation exposuresand supplements this assessment with external rating agency ratings and/or methodology.
The type and frequency of reporting on ANZ’s securitisation exposures is as follows:•

Facilities to securitisation programs are reported using standard credit reporting systems,
distinguished by appropriate product codes. The regular reporting frequency for most of thesesystems is monthly.

•

In addition, all exposures to SPVs are reported to the CMRC on a six-monthly basis. Utilisation ofliquidity facilities are reported internally on a weekly basis.

•

Investments in securitisations are reported through the trading book or other investment
reporting systems.

Accounting policies
Any SPV in which ANZ has involvement is assessed for control under the requirements of AASBInterpretation 112 Consolidation – Special Purpose Entities. Where control is determined to exist, the
SPV is consolidated into ANZ’s financial statements. Financial instruments held and issued either from
SPVs consolidated by ANZ or those held or issued to a non-consolidated SPV are recognised andvalued using the principles of AASB 139 Financial Instruments: Recognition and Measurement.
Derecognition of any transferred ANZ originated assets is determined based on the derecognition
principles of AASB 139. Assets may be fully or partially derecognised when substantially all the risks
and rewards are transferred to the SPV and control of the asset is not retained.
For synthetic securitisations, any transferred credit exposure is recognised through the fair value
measurement of the segregated embedded or stand-alone credit derivative established within the
structure.
Use of external rating agencies
ANZ typically uses Standard & Poor’s, Moody's Investor Services and/or Fitch Ratings forsecuritisations.

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Table 9(d): Traditional and synthetic securitisation Exposure at Default43 44

Sep 11
Traditional securitisations

Underlying asset
Residential mortgage

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided
$M
2,469

162

-

-

Credit cards and other personal loans

-

-

-

10

Auto and equipment finance

-

-

-

1,066

Commercial loans

-

-

-

4

Other

-

-

-

2,076

Total

162

-

-

5,625

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ
originated$M
Underlying asset

Third party
originated
$M

Other
Services$M

Facilities
provided
$M

162

-

-

2,469

Credit cards and other personal loans

-

-

-

10

Auto and equipment finance

-

-

-

1,066

Commercial loans

-

-

-

4

Other

-

-

-

2,076

Total

162

-

-

5,626

Synthetic securitisations

Underlying asset

Residential mortgage

43

For the ANZ originated and Third party originated columns the value shown is the current outstanding value of theassets originated. For the Facilities provided column the value shown is the EAD of facilities extended tosecuritisation undertaken by third parties where ANZ does not act as an originator.

44

Total EAD in Table 9(d) varies from that presented in remaining tables by $45 million. This amount is included in
total asset value of ANZ originated securitisations, however is excluded from facilities provided in Table 9(d) to avoid
double counting.

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Mar 11
Traditional securitisations

Underlying asset
Residential mortgage

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided
$M
1,641

184

-

-

Credit cards and other personal loans

-

-

-

18

Auto and equipment finance

-

-

-

808

Commercial loans

-

-

-

21

Other

-

-

-

2,434

Total

184

-

-

4,922

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ
originated$M
Underlying asset

Third party
originated
$M

Other
Services$M

Facilities
provided$M
1,641

Synthetic securitisations

Underlying asset

Residential mortgage

184

-

-

Credit cards and other personal loans

-

-

-

18

Auto and equipment finance

-

-

-

808

Commercial loans

-

-

-

21

Other

-

-

-

2,434

Total

184

-

-

4,922

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Sep 10
Traditional securitisations

Underlying asset
Residential mortgage

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided
$M
1,908

211

-

-

Credit cards and other personal loans

-

-

-

18

Auto and equipment finance

-

-

-

542

Commercial loans

-

-

-

22

Other

-

-

-

2,887

Total

211

-

-

5,377

ANZ
originated$M

Third party
originated
$M

Other
Services$M

Facilities
provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ
originated$M
Underlying asset

Third party
originated
$M

Other
Services$M

Facilities
provided$M
1,908

Synthetic securitisations

Underlying asset

Residential mortgage

211

-

-

Credit cards and other personal loans

-

-

-

18

Auto and equipment finance

-

-

-

542

Commercial loans

-

-

-

22

Other

-

-

-

2,887

Total

211

-

-

5,377

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Table 9(e): Impaired and Past due loans relating to ANZ originated securitisations

Sep 11

Underlying asset
Residential mortgage

ANZ originated$M

Impaired$M

Past due$M

Losses recognised
for the six
months ended
$M

162

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

162

-

-

-

Mar 11

Underlying asset
Residential mortgage

ANZ originated$M

Impaired$M

Past due$M

Losses recognised
for the six
months ended
$M

184

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

184

-

-

-

Sep 10Underlying asset
Residential mortgage

ANZ originated$M

Impaired$M

Past due$M

Losses recognised
for the six
months ended
$M

211

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

211

-

-

-

Table 9(f): Securitisation – Exposure at Default by exposure type45

Securitisation exposure typeSep 11$M

Mar 11$M

Sep 10$M

Liquidity facilities

1,748

2,002

2,529

Funding facilities

2,684

2,486

2,549

Underwriting facilities

-

-

-

Lending facilities

-

-

-

25

26

25
319

Credit enhancements
Holdings of securities (excluding trading book)

1,213

453

Other

-

-

-

Total

5,670

4,967

5,422

45
Credit enhancement facilities are second loss facilities and benefit from credit enhancement from a third party firstloss provider.

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Table 9(g) part (i): Securitisation – Exposure at Default by risk weight bandSep 11
Securitisation risk weights≤ 25%

Exposure at Default$M

Risk weighted assets
$M

4,752

505

>25 ≤ 35%87

30

>35 ≤ 50%-->50 ≤ 75%

162

83

>75 ≤ 100%

428

429

>100 ≤ 650%

5189

1250% (Deduction)

190

-

5,670

1,136

Total

Mar 11
Securitisation risk weights≤ 25%

Exposure at Default$M

Risk weighted assets
$M

3,914

469

>25 ≤ 35%90

32

>35 ≤ 50%-->50 ≤ 75%185

98

>75 ≤ 100%

536

536

>100 ≤ 650%

4974

1250% (Deduction)

193

-

4,967

1,209

Total

Sep 10
Securitisation risk weights≤ 25%

Exposure at Default$M

Risk weighted assets
$M

3,230

369

>25 ≤ 35%146

51

>35 ≤ 50%20

10

>50 ≤ 75%186

98

>75 ≤ 100%

1,482

1,482

>100 ≤ 650%

54811250% (Deduction)

304

-

5,422

2,091

Total

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ANZ Basel II Pillar 3 disclosure

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Table 9(g) part (ii): Securitisation – Aggregate securitisation exposures by risk weightband

Sep 11
Deductions fromTier 1 Capital$M

Deductions fromTier 2 Capital
$M

Total
$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

95

95

190

Total

95

95

190

Deductions fromTier 1 Capital$M

Mar 11
Deductions fromTier 2 Capital
$M

Total
$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

96

96

192

Total

96

96

192

Deductions fromTier 1 Capital$M

Sep 10
Deductions fromTier 2 Capital
$M

Total
$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

152

152

304

Total

152

152

304

Securitisation exposures deducted from Capital

Securitisation exposures deducted from Capital

Securitisation exposures deducted from Capital

Table 9(h) and 9(i): Security exposures subject to early amortisation or using Standardised
approach
ANZ does not have any Securitisation exposures subject to early amortisation or using Standardised
approach.

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Table 9(j): Securitisation – Summary of current year’s activity by underlying asset typeand facility46
For the six months to 30 Sep 11
Original value securitised
Third party Recognised gain
ANZ originatedoriginatedor loss on sale
$M
$M
$M

Securitisation activity by underlying asset type
Residential mortgage

-

3,016

-

Credit cards and other personal loans

-

16

-

Auto and equipment finance

-

902

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

3,934

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

98

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

625

Other

-

Total

723

For the six months to 31 Mar 11
Original value securitised
Third party Recognised gain
ANZ originatedoriginatedor loss on sale
$M
$M
$M

Securitisation activity by underlying asset type
Residential mortgage

-

1,525

-

Credit cards and other personal loans

-

157

-

Auto and equipment finance

-

695

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

2,377

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

235

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

157

Other

-

Total

392

46

For the ANZ originated and Third party originated columns the value shown is the current outstanding value of theassets originated. For the Facilities provided column the value shown is the EAD of facilities extended tosecuritisation undertaken by third parties where ANZ does not act as an originator.

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For the six months to 30 Sep 10
Original value securitised
Third party Recognised gain
ANZ originatedoriginatedor loss on sale
$M
$M
$M

Securitisation activity by underlying asset type
Residential mortgage

-

971

-

Credit cards and other personal loans

-

139

-

Auto and equipment finance

-

830

-

Commercial loans

-

-

-

Other

-

152

-

Total

-

2,092

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

599

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

29

Other

-

Total

628

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ANZ Basel II Pillar 3 disclosure

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Chapter 7 – Market risk
Table 11

Market risk – Internal models approach

Definition and scope of market risk
Market risk may stem from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings
arising from changes in interest rates, foreign exchange rates and credit spreads, or from fluctuations
in bond, commodity or equity prices.
Market risk management of IRRBB is described in Chapter 10 and therefore excluded from this
Chapter.
Regulatory approval to use the Internal Models Approach
ANZ has been approved by APRA to use the Internal Models Approach (IMA) under APS 116 for all
trading portfolios except for specific interest rate risk and electricity trading. ANZ uses theStandardised approach to market risk capital for these two subsets.
Governance of market risk
The Board Risk Committee oversight of market risk is supported by the CMRC as described in Chapter
3.
The Market Risk function is a specialist risk management unit independent of the business that is
responsible for:•

Designing and implementing policies and procedures to ensure market risk exposures aremanaged within the appetite and limit framework set by the Board.

•

Measuring and monitoring market risk exposures, and approving counterparty and associatedrisks.

•The ongoing effectiveness and appropriateness of the risk management framework.

Traded market risk
The Traded, Foreign Exchange and Commodity Market Risk Policy and accompanying procedures(together the “TFC Framework”) governs the management of traded market risk and its key
components include:•

A clear definition of the trading book.

•

A comprehensive set
communication of risk.

•

A robust Value at Risk (VaR) quantification approach supplemented by comprehensive stresstesting.

•

A comprehensive limit framework that controls all material market risks.

•

An independent Markets Risk function with specific responsibilities.

•

Regular and effective reporting of market risk to executive management and the Board.

ofrequirements

thatpromotetheproactive

identification

andMeasurement of market risk
ANZ’s traded market risk management framework incorporates a risk measurement approach toquantify the magnitude of market risk within trading books. This approach and related analysis
identifies the range of possible outcomes that can be expected over a given period of time andestablishes the relative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR estimates,
sensitivities measures and stress tests. VaR is calculated using a historical simulation with a 500 day
observation period. Traded VaR is calculated at 97.5% confidence interval, one-day holding period for
trading activities for internal purposes and 99% confidence interval, ten-day holding period for the
calculation of regulatory capital. All material market risk factors and all trading portfolios are captured
within the VaR model, with the exception of interest rate risk – specific risk and electricity trading, forwhich capital is calculated using the Standardised approach described in Table 10(b).

63ANZ Basel II Pillar 3 disclosure

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ANZ also undertakes a wide range of stress tests to the Group trading portfolio and to individual
trading portfolios. Standard stress tests are applied daily and measure the potential loss impact
arising from applying the largest market movements during the previous seven years over specificholding periods. Holding periods used to calculate stress parameters differ and reflect the relativeliquidity of each product type.
Results from stress testing on plausible severe scenarios are calculated monthly and potential losses
are reported to the CMRC.
VaR and stress tests are also supplemented by cumulative loss limits and detailed control limits.
Cumulative loss limits ensure that in the event of continued losses from a trading activity, the trading
activity is stopped and senior management reviews before trading is resumed. Where necessary,detailed control limits such as sensitivity or position limits are also in place to ensure appropriate
control is exercised over a specific risk or product.

Comparison of VaR estimates to gains/losses
Back testing involves the comparison of calculated VaR exposures with profit and loss data to identify
the frequency of instances when trading losses exceed the calculated VaR. For APRA backtesting
purposes, VaR is calculated at the 99% confidence interval with a one-day holding period.
Back testing is conducted daily, and outliers are analysed to understand if the issues are the result of
trading decisions, systemic changes in market conditions or issues related to the VaR model i.e.
historical data or model calibration.
ANZ uses actual and hypothetical profit and loss data. Hypothetical data is designed to remove theimpacts of intraday trading and sales margins. It is calculated as the difference between the value ofthe prior day portfolio at prior day closing rates and the value at current day closing rates. Markets
Finance calculates actual profit and loss while Market Risk calculates hypothetical profit and loss.
The following table discloses the high, mean and low VaR values over the reporting period and at
period end, and a comparison of VaR estimates with actual gains/losses over the reporting period.

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Table 11(d): Value at Risk (VaR) over the reporting period47 48

Six months ended 30 Sep 11
Mean$M

Value at Risk (VaR)

Maximum$M

Minimum$M

Period end$M

Equities

1.0

2.5

0.5

2.5

Interest rate

8.1

16.1

4.2

4.7

Foreign exchange

3.4

7.9

1.6

6.0

Commodity

2.2

4.2

1.0

1.4

Credit

5.6

8.5

3.1

3.4

Six months ended 31 Mar 11
Mean$M

Value at Risk (VaR)
Equities

Maximum$M

Minimum$M

Period end
$M

-

-

-

-

Interest rate

10.8

14.9

7.4

8.3

Foreign exchange

3.1

6.0

1.5

3.3

Commodity

2.5

4.0

1.6

3.3

Credit

5.2

7.9

2.4

7.1

Six months ended 30 Sep 10
Mean$M

Maximum$M

Minimum$M

Period end
$M

-

-

-

-

Interest rate

18.7

24.9

11.1

11.2

Foreign exchange

1.6

3.2

1.1

2.6

Commodity

2.3

3.7

1.6

2.1

Credit

3.2

4.9

2.2

3.0

Value at Risk (VaR)
Equities

47

Regulatory VaR is calculated at 97.5% confidence level for a one-day holding period.

48

The Foreign exchange VaR excludes foreign exchange translation exposures outside of the trading book. (NonTrading translation risk includes translation of the net mark-to-market of the structured credit business).

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Reporting of market risk
Market Risk reports results of daily VaR and stress testing to senior management in Market Risk and
the Global Markets business. Market Risk will escalate details of any limit breach to the appropriate
discretion holder within Market Risk and to Group Risk expediently, and report to the CMRC monthly.
Market Risk monitors and analyses back testing results daily and reports results to the CMRC
quarterly.
Mitigation of market risk
The Market Risk team’s responsibilities, including the reporting and escalation processes describedabove, is fundamental to how market risk is managed. Market Risk has presence in all the major
dealing operations centres in Australia, New Zealand, Asia, Europe and America.
Commodities risk
Commodity price risk arises as a result of movement in prices of various commodities. All exposures
are transferred to the trading book and centrally managed by the Global Markets business andmonitored by Market Risk in accordance with the TFC framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in relative values of various currencies.
Exposures from ANZ’s normal operating business and trading activities are recorded in core multicurrency systems and managed within the trading book in accordance with the TFC framework.
Structural exposures from foreign investments and capital management activities are managed inaccordance with policies approved by the Board Risk Committee, with the main objective of ensuringthat ANZ’s capital ratio is largely protected from changes in foreign exchange. As at 30 September
2011, ANZ’s investment in ANZ National is the main source of the structural foreign exchange
exposure.

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Table 10

September 2011Market risk – Standardised approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specificrisk49 and electricity trading risk factors. For internal purposes only ANZ also uses an internal modelfor electricity.
For interest rate risk – specific risk, ANZ’s internal VaR model captures general interest rate and credit
spread risk for all products, but not the credit spread risk associated with individual issuers of interest
rate products.
Table 10(b): Market risk – Standardised approach50

Sep 11$M

Mar 11$M

Sep 10$M

Interest rate risk

141

111

126

Equity position risk

4

7

10

Foreign exchange risk

-

-

-

15

6

10

160

124

146

2,000

1,553

1,822

Commodity risk
Total

Risk Weighted Assets equivalent

49
Specific risk is the risk that the value of a security will change due to issuer-specific factors. It applies to interest
rate and equity positions related to a specific issuer.
50

RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APS 110.

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ANZ Basel II Pillar 3 disclosure

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Chapter 8 – Operational risk
Table 12

Operational risk

Definition of operational risk
Within ANZ, operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and/or systems or from external events. This definition includes legal risk, and therisk of reputation loss or damage arising from inadequate or failed internal processes, people andsystems, but excludes strategic risk and regulatory risk.
Regulatory approval to use the advanced measurement approach
ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculationof operational risk capital requirements under APS 115. This methodology applies across all of ANZ.
Operational risk governance and structure
The roles of the Board Risk Committee and OREC are described in Chapter 3.
The oversight of operational risk management is conducted via three clearly articulated layers of risk
management “Three Lines of Defence”.

Responsible
areaFirst lineofdefenceSecondline ofdefenceBusiness /Enablement

Divisional
Risk

Group Risk

Thirdline ofdefence

Internal Audit

Key responsibilities•

Primary accountability for the understanding of key risks and related control
environment.

•

Undertake day-to-day management of risks, related decision-making andreporting.

•

Promote a strong risk culture of adhering to thresholds, managing risk exposureand making sustainable risk decisions.

•

Ensure operational risk information is up-to-date and reflective of the true
operational risk position.

•

Provide independent oversight and guidance to enable consistent application of
the operational risk measurement and management framework (ORMMF).

•

Coordinate, oversight and report on material operational risks and change
initiatives.

•

Contribute to the identification of systemic issues and risk collation across theDivision.

•Independent function responsible for overarching risk oversight across the bank.

•

Set Group operational risk appetite statements.

•

Develop and maintain relevant policies and procedures to support consistentexecution and continuing appropriateness of ORMMF.

•

Monitor and report compliance with ORMMF, consider and approve any exception
requests.

•

Source external loss data.

•

Lead scenario analysis and operational risk capital calculation process.

•Central point of contact with regulators.

•

Provide global insight and commentary on consolidated bank wide view andidentify group wide exposures and trends.

•

Provide independent and objective assurance to management and ANZ Board
regarding compliance with policy and regulatory requirements.

•

Perform objective assessments across all geographies, Divisions, Lines ofBusiness and processes.

•

Ensure independent review of the adequacy of the ORMMF is undertaken.

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Operational risk principles
ANZ has developed a comprehensive framework to manage operational risk which includes thefollowing operational risk management principles:•

Principle 1: Operational risk is recognised as a primary risk within ANZ and has a governancestructure responsible for maintaining risk governance oversight.

•

Principle 2: ANZ believes risk management is everyone’s responsibility and encourages a cultureof prompt escalation of risk to staff sufficiently senior to drive resolution. This culture is supported
by clearly articulated roles and responsibilities to ensure effective measurement and managementof operational risk.

•

Principle 3: ANZ’s Board has approved the operational risk appetite, including thresholds for risk
assessment and reporting that determines the risk boundaries within which the business must
operate to set its strategy.

•

Principle 4: ANZ periodically identifies and assesses its exposure to material operational risk
within all existing and new products, processes, projects and systems, and assesses the key
controls in place to manage these risks.

•

Principle 5: ANZ incorporates analysis of loss, incident and control failure into improving theunderlying control environment by defining clearly articulated risk response strategies.

•

Principle 6: ANZ holds capital commensurate with its operational risk, and maintains
comprehensive and well documented operational risk capital processes for calculating its
operational risk capital, including monitoring for material changes to capital exposure.

•Principle 7: ANZ maintains a comprehensive and sustainable approach for monitoring andreporting relevant operational risk data, and monitors material changes to operational risk
exposure, including Key Risk Indicators (KRIs), to support the proactive management ofoperational risk across the Group.

•

Principle 8: ANZ has appropriate review processes to continuously evaluate the effectiveness andrelevance of its operational risk measurement and management processes to meet organisational
needs and regulatory requirements.

•

Principle 9: ANZ ensures effective integration of day-to-day operational risk management with
outputs from the operational risk measurement processes, to support risk based decision making.

ANZ’s operational risk framework is delivered through:•Level 1 ANZ Board Operational Risk Policy (the Principles) – approved by the Board Risk
Committee, sets the operational risk principles for governing the overall measurement andmanagement of operational risk across ANZ.

•

Level 2 Global Operational Risk Measurement and Management Policy (the Policy) – approved by
the Board Risk Committee, outlines the core standards, roles and responsibilities and minimum
requirements of the way in which operational risk is measured and managed, in line with Level 1
ANZ Board Operational Risk Policy and APS 115.

•

Level 2A Global Operational Risk Procedures (the Procedures) – owned by Group Operational Risk,
provide the procedures to support the consistent application of Level 1 and Level 2 Global
Operational Risk Policies across ANZ. The procedures are further augmented by tools, templates,
systems and on-going training.

Operational risk management
Given the wide scope of operational risk, a robust operational risk management framework and soundinternal control environment are essential to risk management. The operational risk frameworkprovides the direction for managing operational risk in terms of specifying the accountabilities ofbusiness unit line management and staff, Divisional and Group Operational Risk functions, and therole of Internal Audit in the management of operational risk at ANZ.
Day-to-day management of operational risk is the responsibility of business unit line management andstaff. This includes:•

Primary accountability for the understanding of key risks and related control environment.

•

Analysis of identified risks, including assessing the inherent and residual risk after considerationof controls currently in place. This requires analysis of the potential consequences of failing todeal with the risks, the likelihood of the risks being realised and the effectiveness of the key
controls in place to prevent or mitigate the risk.

•

Evaluation of the risk to determine whether it is within Board approved risk appetite.

•

Identification and implementation of risk treatment options to improve the key controls over therisk for those risks that are outside the risk appetite. When the preferred risk treatment option is
selected the risk treatment plan is documented.

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ANZ Basel II Pillar 3 disclosure

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Ensure operational risk information is up to date and reflective of the true operational risk
position.

•

Monitoring and review of treatment plans, operational risks and controls, including testing the key
controls and reporting on the current operational risk profile.

•

Promote a strong risk culture of adhering to thresholds, managing risk exposure and making
sustainable risk decisions.

•

Dedicated Divisional and Group Corporate Centre Risk Governance teams play a support,monitoring, oversight and challenge role with Internal Audit providing independent assurance andreview.

Operational risk mitigation
In line with industry practice, ANZ obtains insurance cover from third party and captive providers for
those operational risks where cost-effective premiums can be obtained. ANZ’s AMA operational risk
regulatory capital does not utilise insurance mitigation under APS 115.
Business disruption is a critical risk to a bank’s ability to operate, so ANZ has comprehensive business
continuity, recovery and crisis management plans. The intention of the business continuity andrecovery plans is to ensure critical business functions can be maintained, or restored in a timely
fashion, in the event of material disruptions arising from internal or external events.
Crisis management planning at Group and country levels supplement business continuity plans in theevent of a broader Group or country crisis. Crisis management plans include crisis team structures,roles, responsibilities and contact lists, and are subject to testing.
Operational risk reporting
ANZ maintains a comprehensive and sustainable approach for monitoring and reporting relevant
operational risk data, including KRIs, to support the proactive management of operational risk acrossthe Group.
Operational risks from the business must be reported and escalated to senior management in a timely
manner as per the defined risk acceptance criteria and thresholds.
Material operational risk information (including actual losses, near misses and breaches) must be
received by appropriate senior management and committees (Divisional Risk Committee or OREC) on
a timely basis, in a form and format that will aid in the monitoring and control of the operational risks
and which supports risk based decision making. Information to be reported includes; internal loss data
and trend analysis, risk and key control assessment outcomes, KRIs, scenario analysis outcomes,
capital outcomes, sensitivity analysis results, policy breaches and any other information to ensure
effective monitoring of the framework implementation.
ANZ’s advanced measurement approach
Group Operational Risk is responsible for maintaining ANZ’s AMA for operational risk measurement
and capital allocation.
Operational risk capital is held to protect depositors and shareholders of the bank from rare andsevere unexpected losses. In order to quantify the overall operational risk profile, ANZ maintains andcalculates operational risk capital (including regulatory and economic capital), on at least a six
monthly basis. The capital is calculated using scaled External Loss Data, Internal Loss Data andscenarios as a direct input and risk registers as an indirect input.
ANZ typically models capital at a divisional or geographic layer. Once calculated, the capital isallocated to lines of business according to risk exposure (key allocation drivers). Understanding the
make up of the key allocation drivers allows lines of business to consider capital impacts when making
decisions. Accordingly, capital allocations are structured to encourage businesses to effectively
manage their operational risk exposures e.g. improve controls, reduce losses etc.
In the event of an ‘off cycle’ scenario review, a recalculation is performed within the relevant cell of
the model, to judge the sensitivity of the change on capital. The outcomes of the off-cycle calculation
are shared with executive management and decisions are made as to whether to adjust capital orincorporate a scenario change in to the next capital update. This ensures that capital levels are
responsive to material changes in risk levels across ANZ.

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Capital modelling uses the following expected and unexpected losses as data inputs:•

Minimum of five years of historical internal losses captured and reported in the Bank-wide
Operational Loss Database (BOLD).

•

Relevant external losses, sourced from Algo First Op Data (includes losses >USD1 million) a
recognised industry database. This data is suitably scaled using internally developed rules toensure relevance to ANZ’s size and operations.

•

Scenario analysis, unexpected potential loss estimates for severe but plausible risk events.

ANZ does not use expected loss offsets for the purposes of regulatory capital modelling and does notrecognise the risk-mitigating effect of insurance in determining operational risk capital.
Operational risk modelling is performed at the divisional or geographic level for applicable Basel risk
event types. Operational risk capital is derived using probability distributions and calculated using
Monte Carlo simulations using a mathematical method called a loss distribution approach.
Operational risk modelling is performed by a specialist central function. Operational risk capital isderived using probability distributions and calculated using Monte Carlo simulations at the division andevent type level referred to as a modelling cell. The data inputs are combined for each cell using a loss
distribution approach and include the following:•

Historical internal losses captured and reported in an internal loss database.

•

Relevant external losses sourced from a reputable industry supplier. This data is suitably scaled
using internally developed rules to ensure relevance to ANZ’s size and operations.

•

Scenario analysis data for severe but plausible risk events, elicited in workshops with risk andbusiness professionals.

Capital outcomes include:•

Operational risk regulatory capital to meet the regulatory capital soundness standard based on a
99.9% confidence interval in accordance with APS 115.

•

Economic Capital based on a 99.97% confidence interval.

ComplianceGroup Compliance has global oversight responsibility for the ANZ Compliance Framework, and eachdivision has responsibility for embedding the framework into its business operations, identifying all
regulatory compliance obligations, and escalating when breaches occur. The Compliance framework
fosters an integrated approach where staff are responsible and accountable for compliance, either
within their job role, or within their area of influence.

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Chapter 9 – Equities
Table 13Equities – Disclosures for banking book positions

Definition and categorisation of equity investments held in the banking book
Equity risk is the potential loss that may be incurred on equity investments in the banking book.
ANZ’s equity exposures in the banking book are primarily categorised as follows:•

Equity investments that are taken for strategic reasons - These transactions represent
strategic business initiatives and include ANZ’s investments in and partnership arrangementswith financial institutions in Asia. These investments are undertaken only after extensive
analysis and due diligence by Group Strategy, internal specialists and external advisors,
where appropriate. Board approval is required prior to committing to any investments overdelegated authorities, and all regulatory notification requirements are met. Performance of
these investments is monitored by both the owning business unit and Group Strategy toensure that it is within expectations and the values of the investments are tested at least
annually for impairment.

•

Equity investments on which capital gains are expected - These transactions are originatedand managed by dedicated equity finance teams. These transactions represent funding
solutions for known customers of ANZ and are governed by specific policies. ANZ ensuresthat the investment in these entities does not constitute a controlling interest in the relevantbusiness.

•

Equity investments made as the result of a work out of a problem exposure - From time totime, ANZ will take an equity stake in a customer as part of a work out arrangement for
problem exposures. These investments are made only where there is no other viable option
available and form an immaterial part of ANZ’s equity exposures.

Valuation of and accounting for equity investments in the banking bookIn line with Group Accounting Policy the accounting treatment of equity investments depends onwhether ANZ has significant influence over the investee.
Investments in associates
Where significant influence is assessed, the investment is classified as an Investment in Associate in
the financial statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of
the results of associates is included in the consolidated income statement. The associate investments
are recognised at cost plus ANZ’s share of post acquisition net assets. Interests in associates arereviewed annually for impairment, using either market value, or a discounted cash flow methodology
to assess value in-use.
APRA requires that equity accounted earnings from associates, including strategic investments inpartnerships are excluded from regulatory capital until received in the form of a dividend.
Available-for-Sale Investments
Where ANZ does not have significant influence over the investee, the investment is classified as
Available-for-Sale (AFS). The investment is initially recognised at fair value plus transaction
costs. Changes in the fair value of the investments are recognised in an equity reserve with any
impairment recognised in the income statement. When the asset is sold the cumulative gain or loss
relating to the asset held in the AFS revaluation reserve is transferred to the income statement.

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Table 13(b) and 13(c): Equities – Types and nature of Banking Book investments

Sep 11$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,985

2,179

Value of unlisted (privately held) equities

1,976

2,011

Total

3,961

4,190
Mar 11$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,861

2,818

Value of unlisted (privately held) equities

1,789

1,825

Total

3,650

4,643
Sep 10$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,903

2,831

Value of unlisted (privately held) equities

1,514

1,566

Total

3,417

4,397

Half Year
Sep 11$M

Half Year
Mar 11$M

Half Year
Sep 10$M

Cumulative realised gains (losses) from disposals
and liquidations in the reporting period

24

5

23

Cumulative realised losses from impairment andwritedowns in the reporting period

(15)

(37)

(8)

Total unrealised gains (losses)

49

1

(80)

-

-

-

Sep 11$M

Mar 11$M

Sep 10$M

Table 13(d) and 13(e): Equities – gains (losses)

Gains (losses) on equity investments

Total unrealised gains (losses) included in Gross
Tier 1/Tier 2 capital

Table 13(f): Equities Risk Weighted Assets

Risk Weighted Assets
Equity investments subject to a 300% risk weight

3

6

1

Equity investments subject to a 400% risk weight

1,396

1,629

1,576

Total RWA - Equity

1,399

1,635

1,577

Supervisory provisions

-

-

-

Grandfathering provisions

-

-

-

Aggregate amount of equity investments subject to:73

ANZ Basel II Pillar 3 disclosure

September 2011

Chapter 10 – Interest Rate Risk in the Banking Book
Table 14

Interest Rate Risk in the Banking Book

Definition of interest rate risk in the banking bookInterest rate risk in the banking book (IRRBB) relates to the potential adverse impact of changes inmarket interest rates on ANZ’s future net interest income. The risk generally arises from:•

Repricing and yield curve risk - the risk to earnings or market value as a result of changes in theoverall level of interest rates and/or the relativity of these rates across the yield curve.

•

Basis risk - the risk to earnings or market value arising from volatility in the interest margin
applicable to banking book items.

•

Optionality risk - the risk to earnings or market value arising from the existence of stand-alone orembedded options in banking book items.

Regulatory capital approach
ANZ has received approval from APRA to use the IMA for the calculation of regulatory capital for
IRRBB, under APS 117.
Governance
The Board Risk Committee has established a risk appetite for IRRBB and delegated authority to the
GALCO to manage the strategic position (capital investment term) and oversee the interest rate risk
arising from the repricing of asset and liabilities (mismatch risk) in the banking book. GALCO hasdelegated the management of this mismatch risk to the Global Markets business.
Market Risk is the independent function responsible for:•

Designing and implementing policies and procedures to ensure that IRRBB exposure is managed
within the limit framework set by the Board Risk Committee.

•

Monitoring and measuring IRRBB market risk exposure, compliance with limits and policies.

•

Ensuring ongoing effectiveness and appropriateness of the risk management framework.

Management framework
IRRBB is managed under a comprehensive measurement and reporting framework, supported by anindependent Market Risk function. Key components of the framework include:•

A comprehensive set of policies that promote proactive risk identification and communication.

•

Funds Transfer Pricing framework to transfer interest rate risk from business units so it can be
managed by the Global Markets business and monitored by Market Risk.

•

Quantifying the magnitude of risks and controlling the potential impact that changes in market
interest rates can have on the net interest income and balance sheet fair value of ANZ.

•

An independent Market Risk function with specific responsibilities.

•

Regular and effective reporting of IRRBB to executive management and the Board.

Measurement of interest rate risk in the banking book
ANZ uses the following principal techniques to quantify and monitor IRRBB:•Interest Rate Sensitivity - this is an estimate of the change in economic value of the banking bookdue to a 1 basis point move in a specific part of the yield curve.

•

Earnings at risk (EaR) - this is an estimate of the amount of income that is at risk from interest
rate movements over a given holding period, expressed to a 97.5% or 99% level of statisticalconfidence.

•

Value at risk (VaR) - this is an estimate of the impact of interest rate changes on the banking
book’s market value, expressed to a 97.5% (internal purposes) or 99% (regulatory purposes)
level of statistical confidence for a given holding period.

•

Market Value loss limits - this mitigates the potential for embedded losses within the banking
book.

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Stress testing - standard and extraordinary tests are used to highlight potential risk which may
not be captured by VaR, and how the portfolio might behave under extraordinary circumstances.

The calculations used to quantify IRRBB require assumptions to be made about the repricing term of
exposures that do not have a contractually defined repricing date, such as deposits with no set
maturity dates, and prepayments. Changes to these assumptions require GALCO approval.
Where relevant, IRRBB techniques recognise foreign currency effects as all measures are expressed inAustralian dollars.
Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate atheoretical worst outcome at a specified confidence level (typically 99%) less the average outcome.
Reporting of interest rate risk in the banking bookMarket Risk analyses the output of ANZ’s VaR and EaR calculations daily. Stress tests are calculatedmonthly. Compliance with the risk appetite and limit framework is reported to CMRC, GALCO and theBoard Risk Committee.
IRRBB regulatory capital is calculated monthly.
ANZ’s interest rate risk in the banking book capital requirement
The IRRBB regulatory capital requirement includes a value for repricing and yield curve risk, basis andoptionality risks based on a 99% confidence interval, one year holding period and a six year historical
data set.
Embedded losses also make up the capital requirement and are calculated as the difference between
the book value of banking book items and the current economic value.
Results of standard shock scenario
The Basel II framework sets out a standard shock scenario of a 200 basis point parallel shift change ininterest rates, in order to establish a comparable test across banks.
Table 14(b) that follows shows the results of this test by currency of the exposures outside the trading
book.

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ANZ Basel II Pillar 3 disclosure

September 2011

Table 14(b): Interest Rate Risk in the Banking Book
Change in Economic Value
Sep 11$M

Standard Shock Scenario Stress Testing:Interest rate shock applied

Mar 11$M

Sep 10$M

AUD
200 basis point parallel increase

53

28

128

200 basis point parallel decrease

(54)

(24)

(135)

200 basis point parallel increase

22

(8)

(1)

200 basis point parallel decrease

(25)

5

(0)

200 basis point parallel increase

(30)

(54)

(18)

200 basis point parallel decrease

12

39

11

200 basis point parallel increase

(6)

(3)

(8)

200 basis point parallel decrease

3

2

3

200 basis point parallel increase

20

21

(25)

200 basis point parallel decrease

1

(7)

16

NZD

USD

GBP

Other

IRRBB regulatory capital

675

809

615

IRRBB regulatory RWA

8,439

10,112

7,690

Stress testing methodology
Stress tests within ANZ include standard and extraordinary tests. These tests are used to highlightpotential risk which may not be captured by VaR, and how the portfolio might behave under
extraordinary circumstances. Standard stress tests include statistically derived scenarios based on
historical yield curve movements. These combine parallel shocks with twists and bends in the curve to
produce a wide range of hypothetical scenarios at high statistical confidence levels, with the single
worst scenario identified and reported. Extraordinary stress tests include interest rate moves from
historical periods of stress as well as stresses to assumptions made about the repricing term of
exposures. The rate move scenarios include daily changes over the stressed periods and the worst
theoretical losses over the selected periods are each reported. Stresses of the repricing term
assumptions investigate scenarios where actual repricing terms are vastly different to those modelled.

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September 2011

Chapter 11 – Liquidity risk
Overview
Liquidity risk is the risk that ANZ has insufficient capacity to fund increases in assets or is unable tomeet its payment obligations as they fall due, including repaying depositors or maturing wholesale
debt. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking
operations and is closely monitored by ANZ.
Governance
The management of ANZ’s liquidity and funding risk is overseen by the Board Risk Committee and
GALCO, in accordance with ANZ’s liquidity policy framework.
Scenario modelling
The Global Financial Crisis highlighted the importance of differentiating between stressed and normal
market conditions in a name-specific crisis, and the different behaviour that offshore and domestic
wholesale funding markets can exhibit during market stress events. Scenario modelling stresses site
and total bank cashflow projections against multiple ‘survival horizons’. (A ‘survival horizon’ is theperiod that ANZ is required to remain cash flow positive under a specific scenario or stress.)
Scenarios modelled are either prudential requirements, i.e. a ‘going-concern’ scenario or ‘name crisis’
scenario; or Board approved events including ‘name-specific’ stresses and ‘funding market’ events.
Under these scenarios, customer and wholesale balance sheet asset/liability flows are stressed.
Funding
ANZ manages its funding profile using a range of funding metrics and balance sheet disciplines. Thisapproach is designed to ensure that an appropriate proportion of the Group’s assets are funded bystable funding sources including core customer deposits, longer-dated wholesale funding (with aremaining term exceeding one year) and equity. This includes targeting a diversified funding base,
avoiding undue concentrations by investor type, maturity, market source and currency.
Customer deposits and other funding liabilities increased by 16% to $308.2 billion and now represents
61% of all funding, an increase of 3% from 30 September 2010.
$18.0 billion of term wholesale debt (with a remaining term greater than one year), including $2.4
billion of pre-funding executed during full year 2010, was issued during the 2011 financial year. In
addition, ANZ raised $1.34 billion in hybrid capital, taking the total term debt and hybrid issuance forthe 2011 financial year to $19.4 billion. As at 30 September 2011, term wholesale funding
represented 12% of total funding, a decrease from 16% as at 30 September 2010 (partly due to 2011financial year pre-funding completed during 2010 financial year as funding was replaced withcustomer deposits and Tier 1 capital).
ANZ maintained access to all major global wholesale funding markets during 2011.
Over 70% of term funding requirements were completed during the first half, before market
conditions began to deteriorate. Benchmark term debt issues were completed in AUD, USD, JPY, CHF,
CAD and NZD.
All short-term wholesale funding needs were comfortably met, despite an increase in volatility inoffshore markets and a general shortening of tenor preference from US money market investors.
The weighted average tenor of new term debt issuance was 4.7 years (unchanged year-on-year).
The weighted average cost of new term debt issuance during 2011 declined marginally (4 basis
points) relative to 2010. Average portfolio costs remain substantially above pre-crisis levels andcontinue to increase as maturing term wholesale funding is replaced at higher spreads.
Over the past year strong customer deposit growth and stable term debt issuance has allowed ANZ tomaintain a low reliance on short-term wholesale funding markets. The proportion of total funding
sourced from short-term wholesale funding markets was unchanged at 12% between 30 September
2010 and 30 September 2011.

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Liquidity portfolio
The Group holds a diversified portfolio of cash and high credit quality securities that may be sold or
pledged to provide same-day liquidity. This portfolio helps protect the Group’s liquidity position by
providing cash in a severely stressed environment. All assets held in this portfolio are securities
eligible for repurchase under agreements with the applicable central bank (i.e. ‘repo eligible’).
At 30 September 2011 the volume of eligible securities available, post any repurchase (i.e. ‘repo’)
discounts applied by the applicable central bank, was $71.4 billion. In addition, the liquidity portfolio
provided cover against over one year of offshore wholesale debt maturities.
The Liquidity portfolio is well diversified by counterparty, currency, and tenor. Under the liquidity
policy framework securities purchased must be of a similar or better credit quality to ANZ’s external
long-term or short-term credit ratings and continue to be repo eligible.
Supplementing the prime liquid asset portfolio, the Group holds:•

Additional central bank deposits with the US Federal Reserve and Bank of Japan of $10.3 billion.

•

Secondary sources of liquidity including Australian Government securities, Australian State
Government securities and gold of $9.6 billion.

•

Additional cash and other securities to satisfy local country regulatory liquidity requirements.

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Appendix 1 – Detail of capital structure

Fundamental Tier 1 capitalSep 11$M

Mar 11$M

Sep 10$M

Paid-up ordinary share capital

21,577

20,83920,140Reserves
Foreign currency translation reserve
Share and share option reserve
Transactions with non-controlling interest
reserve
Total reserves
Prudential retained earnings
Retained earnings including current year
earnings(2,418)(3,299)(2,742)

174

156

168

(22)
(2,266)(3,143)(2,574)

17,787

16,76615,921

Accumulated retained profits and reservesof insurance, funds management andsecuritisation entities and associates(1,679)(1,269)(1,312)

Dividend not provided for(1,999)(1,662)(1,895)

Deferred fee revenue including fees deferred
as part of loan yields

414

398

402

Accrual for Dividend Reinvestment Plans

600

Total prudential retained earnings

499

569

15,123

14,732

41

64

64

Total

34,47532,49231,315

Deductions from Tier 1 capitalSep 11$M

Mar 11$M

Sep 10$M

Goodwill(2,968)(2,795)(2,910)Non-controlling interests

13,685

Other deductions from Tier 1 capital
Intangible component of investment in
OnePath Australia and New Zealand(excluding prudential goodwill)(2,071)(2,059)(2,043)

Capitalised software and other intangible
assets(1,549)(1,323)(1,169)

Capitalised expenses including loan andlease origination fees, capitalised
securitisation establishment costs and costs
associated with debt raisings

(688)

(666)

(655)

Applicable deferred tax assets (excluding
the component relating to the generalreserve for impairment of financial assets)

(136)

(154)

(235)

Mark-to-market impact of own credit spread(128)

Total other deductions from Tier 1 capital(18)(4,572)(19)(4,220)(4,121)50/50 deductions from Tier 1 capital
Investment in ANZ insurance subsidiaries

(200)

(200)

(198)

Investment in funds management entities
Investment in OnePath Australia and New
ZealandInvestment in other Authorised Deposittaking Institutions and overseas equivalents

(29)

(29)

(36)

(906)

(901)

(845)

(1,151)(1,162)(988)

Investment in other commercial operations

(2)

(8)

(21)

Expected loss in excess of eligible provisions

(475)

(473)

(560)

Other

(308)

Total 50/50 deductions from Tier 1 capital
Total deductions from Tier 1 capital

79

(282)

(378)

(3,071)(3,055)(3,026)(10,611)(10,070)(10,057)ANZ Basel II Pillar 3 disclosure

September 2011

Deductions from Tier 2 capital
Upper and lower Tier 2 capital deductions

Sep 11$M

Mar 11$M

Sep 10
$M

(28)

(28)

(28)

50/50 deductions from Tier 2 capital
Investment in ANZ insurance subsidiaries

(200)

(200)

Investment in funds management entities
Investment in OnePath Australia and New
ZealandInvestment in other Authorised Deposit
Taking Institutions and overseas equivalents

(29)

(29)

(198)
(36)

(906)

(901)

(845)

(1,151)(1,162)(988)

Investment in other commercial operations

(2)

(8)

(21)

Expected loss in excess of eligible provisions

(475)

(473)

(560)

Other

(308)

Total 50/50 deductions from Tier 2 capital
Total deductions from Tier 2 capital

80

(282)

(378)

(3,071)(3,055)(3,026)(3,099)(3,083)(3,054)

ANZ Basel II Pillar 3 disclosure

September 2011

Appendix 2 – ANZ Bank (Europe) Limited
ANZ Bank (Europe) Limited (ANZBEL) is a 100% owned and controlled subsidiary of ANZ, and isregulated by the Financial Services Authority (FSA). ANZBEL is subject to similar Pillar 3 requirements
as ANZ, under the FSA's Prudential Source Book for Banks, Building Societies and Investment Firms(BIPRU). The FSA has granted ANZBEL a Pillar 3 Disclosure waiver direction, which can be found on
the FSA website: fsa.gov.uk/pubs/waivers/bipru_waivers.pdf.
In line with the FSA waiver direction, ANZBEL will rely on disclosures in this document to satisfy mostof its Pillar 3 disclosure obligations. The following FSA requirements are not mirrored in APS 330 orincluded in this disclosure document, and as such are required by the FSA to be reported on an
individual basis in the annual ANZBEL Statutory Accounts:•

BIPRU 11.5.4R (4) - Disclosure of the firm’s minimum capital requirements covering position,
foreign exchange, commodity, counterparty and concentration risks.

•

BIPRU 11.5.12R – Disclosure: Market Risk.

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September 2011

ANZ Basel II Pillar 3 disclosure

September 2011