ANZ Basel II Pillar 3 disclosure

September 2010

2010
BASEL IIPILLAR 3

YEAR ENDED 30 SEPTEMBER 2010
APS 330: CAPITAL ADEQUACY &RISK MANAGEMENT IN ANZ

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ANZ Basel II Pillar 3 disclosure

September 2010

Important NoticeThis document has been prepared by Australia and New Zealand Banking Group Limited(ANZ) to meet 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 2010. 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 2010

TABLE OF CONTENTS1
Chapter 1 – Highlights ............................................................................................ 4
Chapter 2 – Introduction ......................................................................................... 6
Purpose of this document ................................................................................. 6
Chapter 3 - Risk appetite and governance .................................................................. 8
Risk types ................................................................................................... 8
Risk Appetite Framework.................................................................................. 8
Risk management governance .......................................................................... 9
Chapter 4 – Group structure and capital adequacy .................................................... 12
Table 1
Scope of application ..................................................................... 12
Table 2
Capital Structure ......................................................................... 14
Table 3
Capital adequacy ......................................................................... 17
Chapter 5 – Credit risk .......................................................................................... 22
Summary of Credit risk disclosures ................................................................. 22
Table 4Credit risk – General disclosures .................................................... 22
Table 5Credit risk – Disclosures for portfolios subject to the Standardised
Approach and supervisory risk weighting in the IRB approach............. 33
Table 6
Credit risk – Disclosures for portfolios subject to IRB approaches ........ 34
Table 7
Credit risk mitigation disclosures .................................................... 43
Table 8General disclosures for derivatives and counterparty credit risk .......... 47
Chapter 6 – Securitisation ..................................................................................... 49
Table 9Securitisation disclosures .............................................................. 49
Chapter 7 – Market Risk ........................................................................................ 56
Table 11
Market risk – Internal Models Approach (IMA) .................................. 56
Table 10Market risk – Standardised Approach .............................................. 59
Chapter 8 – Operational Risk.................................................................................. 60
Table 12
Operational Risk .......................................................................... 60
Chapter 9 – Equities ............................................................................................. 63
Chapter 10 - Interest rate risk in the banking book (IRRBB) ....................................... 65
Table 14
Interest rate risk in the banking book ............................................. 65
Chapter 11 – Liquidity risk ..................................................................................... 68
Appendix - ANZ Bank (Europe) Limited .................................................................... 70

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 2010

Chapter 1 – Highlights2

Capital ratios

8.2%

13.5%

10.6%

10.7%

1.6%

2.2%

9.0%

8.5%

8.0%

Sep-09Mar-10

Sep-10

2.2%

10.1%
2.1%

1.8%
6.4%

Mar-09C ore Tier 1

11.3%

567.8

Tier 1 capital position has been impacted
since Sep 09 mainly via:•
Acquisitions, reducing Tier 1 by 131bps(largest impact from ING of 79bps)•
Offset by underlying earnings net of
dividends of 119bps.

FSA Sep10
Pro-forma

Hybrid Tier 1

Exposure at Default ($bn)$bn600Strong capital position maintained

524.3

531.7

Sep-09Mar-10Growth in EAD to $559.6bn driven by:
559.6

•

Increases in Residential Mortgages inAustralia and global Sovereign exposures,and Acquisitions of Landmark and RBS
over 2010.

500
400
300
200
100
0
Mar-09Corporate
QRR & Other RetailStandardisedBank & Sovereign
Specialised Lending

Sep-10Residential Mortgage
Other CRWAs

Movement in Credit Risk Weighted Assets ($bn)

Similarly, increase in credit RWA driven
by:
•

5.8
229.8

(1.3)

(6.2)
(1.5)

6.9

233.5

•
•

Sep-092

Acq.

GrowthData
Review

FX
ImpactRisk

Acquisitions
relating
toRBS
andLandmark,
Mortgages and Sovereign asset classes,(driving lower risk weights),
This is partially offset by FX impacts andportfolio risk improvement, particularly
from reduced tenors and upgrades.

Sep-10FSA Sep-10 Pro-forma represents estimated capital ratio using UK Financial Services Authority capital rules.

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ANZ Basel II Pillar 3 disclosure

September 2010

Average Risk Weights (CRWA/EAD)

120%

Sep-09Mar-10•

Sep-10Change in portfolio mix from contractionin Corporate EAD and growth in Sovereign
and Residential Mortgages with lower
average risk weights
Risk weights remained stable since Mar
10

96%

96%

100%
80%

Portfolio Average Risk Weight decreased
2.1% to 41.7% over the FY10

69%

64%

60%

•

51%

40%
18%

13%

20%

Standardised

Other
CRWAs

Specialised
Lending

QRR & Other
RetailCorporate

Bank &
Sovereign

Residential
Mortgage0%

Impaired Assets remained stable since
Mar 10

Impaired Assets ($m)

•

4,922

6,001

6,420

•

4,141

•
17

673

560

141

Mar-09Sep-09Mar-10

Sep-10Restructured

Impaired Loans/Facilities

Provision ratios (Provisions/CRWA)

1.97%

2.10%

2.15%

1.58%

1.06%

Mar 09With default rates in 2H10 lower than thefirst half, due to lower number of larger
defaults
Increases due to acquisitions were offset
by upgrades to productive within theinstitutional portfolio
Excluding acquisitions, impaired assets
reduced ~5.5% since Mar 10

1.31%

Sep 091.38%

Mar 101.35%

Sep 10Total Provision Balance / C redit RWA
C P Balance / C redit RWA

5

Provision coverage ratios remained solid•High coverage of acquired portfolios inboth RBS and Landmark

ANZ Basel II Pillar 3 disclosure

September 2010

Chapter 2 – Introduction
Purpose of this document
This document has been prepared in accordance with the Australian Prudential Regulation Authority(APRA) Australian 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, knownas ‘Basel II’3. In simple terms, Basel II consists of three mutually reinforcing ‘Pillars’:

Pillar 1

Pillar 2

Pillar 3

Minimum capital requirements

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 was one of the first banks in the world to receive accreditation for the mostadvanced approaches permitted under Basel II for credit and operational risk, complementing its
existing accreditation for market risk.
In addition to releasing APS 330 for Pillar 3, APRA has a suite of ‘Pillar 1’ prudential standards - ofwhich the following relate to ANZ:•APS 110: Capital Adequacy•

APS 111: Capital Adequacy: Measurement of Capital•

APS 112: Capital Adequacy: Standardised Approach to Credit Risk•

APS 113: Capital Adequacy: Internal Ratings-based Approach to Credit Risk•

APS 115: Capital Adequacy: Advanced Measurement Approaches to Operational Risk•

APS 116: Capital Adequacy: Market Risk•

APS 117: Capital Adequacy: Interest Rate Risk in the Banking Book•

APS 120: Securitisation•

APS 150: Basel II Transition•

APS 220: Credit Quality•

APS 221: Large Exposures

In contrast to most jurisdictions, Interest Rate Risk in the Banking Book is included in the Pillar 1
calculation of regulatory capital adequacy under APRA prudential standards, rather than being
addressed as part of the Internal Capital Adequacy Assessment Process of Pillar 2.

3
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 2010

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 International Financial Reporting Standards. As such, there aredifferences in some common areas of disclosures. These differences are most pronounced in thecredit 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, banks are accredited toprovide 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.

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ANZ Basel II Pillar 3 disclosure

September 2010

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:oTraded 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 marketoNon-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 and reputation risk4•

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 is defined as the risk of financial loss due to unexpected movements in volume,
profit margin, and operating expenses (excluding risks elsewhere defined) arising from
unexpected changes in the 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 - the risk that ANZ does not conduct its business in accordance with the laws,
regulations and adopted codes of the countries in which it operates

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.

4
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 reputational risk
considerations.

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ANZ Basel II Pillar 3 disclosure

September 2010

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

Assists the Board of Directors in the effective discharge of the Board’s
responsibilities for business, market, credit, equity and other investment,
financial, operational, liquidity, compliance andreputationalriskmanagement

Audit Committee

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.

GovernanceCommittee

Ensures an appropriate Board and Committee structure is in place. Reviews
the development of and approves corporate governance policies andprinciples 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, 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 market risk.

In all cases this is in accordance with the 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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September 2010

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
incorporating Economic Loss Provisioning methodology. CMPC is also responsible for making capitalmanagement 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, aligning capital levels and targets to risk appetiteand 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) and shall normally meet six
times a year.
Credit and Market Risk Committee (CMRC)
CMRC is the senior executive management forum responsible for the oversight and control of credit
and traded 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 weekly, and is supported by a specialist committee thatcovers 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 Chief Risk Officer (CRO) Australia and shall normally meet six times a year
supports CMPC and CMRC, and in turn is supported by working groups.

It

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 meets six times per year.

10ANZ Basel II Pillar 3 disclosure

September 2010

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 and regulatory issues.
RRC is chaired by ANZ’s CRO and shall normally meet six times a year.

11ANZ Basel II Pillar 3 disclosure

September 2010

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.

Consolidation, capital reporting and measurement
For financial reporting purposes, ANZ consolidates the financial statements of the Company and all its
controlled entities where it is determined that there is a capacity to control. Control means the power
to govern directly or indirectly the financial and operating policies of an entity so as to obtain benefits
from its activities. In relation to special purpose entities, such control is deemed to exist where, in
substance:•

the majority of the residual risks and rewards from the activities of the entity accrue to ANZ; or,•

ANZ controls the entity’s decision making powers so as to obtain the majority of the risks andrewards from the entity’s activities.

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 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•

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.
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).

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ANZ Basel II Pillar 3 disclosure

September 2010

Details of the capital treatment of ANZ’s material subsidiaries are shown below:

Included in Level 2?

Capital Treatment

Business

Amerika Samoa Bank

Name

Yes

Assets Risk Weighted

Banking

ANZ Bank (Vietnam) Limited

Yes

Assets Risk Weighted

Banking

ANZ Capel Court Limited

Yes

Assets Risk Weighted

Investment Banking

ANZ Capital Hedging Pty Ltd

Yes

Assets Risk Weighted

Hedging

ANZ Commodity Trading Pty Ltd

Yes

Assets Risk Weighted

Finance

ANZ Cover Insurance Pty Ltd

No

Investment Deducted

Captive-Insurance

ANZ Trustees Limited

No

Investment Deducted

Trustee/Nominee

ANZ Funds Pty Ltd

Yes

Assets Risk Weighted

Holding Company

ANZ Bank (Europe) Limited

Yes

Assets Risk Weighted

Banking

ANZ Bank (Kiribati) Limited

Yes

Assets Risk Weighted

Banking

ANZ Bank (Samoa) Limited

Yes

Assets Risk Weighted

Banking

ANZ Holdings (New Zealand) Limited

Yes

Assets Risk Weighted

Holding Company

ANZ National Bank Limited

Yes

Assets Risk Weighted

Banking

ANZ Investment Services (New Zealand) Limited

Yes

Assets Risk Weighted

Fund Manager

ANZ National (Int'l) Limited

Yes

Assets Risk Weighted

Finance

Arawata Assets Limited

Yes

Assets Risk Weighted

Finance

ING (NZ) Holdings Limited

No

Investment Deducted

Holding Company

No

Investment Deducted

Holding Company

ING Insurance Holdings Limited

No

Investment Deducted

Insurance

Private Nominees Limited

ING Life (NZ) Limited

Yes

Assets Risk Weighted

Nominee

UDC Finance Limited

Yes

Assets Risk Weighted

Finance

Yes

Assets Risk Weighted

Holding Company

ANZ Asia Limited

Yes

Assets Risk Weighted

Banking

ANZ International (Hong Kong) Limited

ANZ Bank (Vanuatu) Limited

Yes

Assets Risk Weighted

Banking

ANZ International Private Limited

Yes

Assets Risk Weighted

Holding Company
Merchant Banking

ANZ Singapore Limited

Yes

Assets Risk Weighted

ANZ Royal Bank (Cambodia) Limited

Yes

Assets Risk Weighted

Banking

LFD Limited

Yes

Assets Risk Weighted

Holding Company

Minerva Holdings Limited

Yes

Assets Risk Weighted

Holding Company

Yes

Assets Risk Weighted

Investment

Yes

Assets Risk Weighted

Investment

ANZ Lenders Mortgage Insurance Pty Limited

No

Investment Deducted

Mortgage Insurance

ANZ Nominees Limited

Yes

Assets Risk Weighted

Nominee

ANZ Orchard Investments Pty Ltd

Yes

Assets Risk Weighted

Holding Company

No

Investment Deducted

Holding Company

OnePath Life Limited (formerly ING Life Limited)

No

Investment Deducted

Insurance

OnePath General Insurance Pty Limited (formerly ING General Insurance Pty Limited

No

Investment Deducted

Insurance

Upspring Limited
Votraint No.1103 Pty Ltd

OnePath Australia Limited (formerly ING Australia Limited

OnePath Funds Management Limited (foremerly ING funds Management Limited)

No

Investment Deducted

Funds Management

OnePath Custodians Limited (formerly ING Custodians Pty Ltd)

No

Investment Deducted

Custody

Australia and New Zealand Banking Group (PNG) Limited

Yes

Assets Risk Weighted

Banking

Chongqing Liangping ANZ Rural Bank Company Limited

Yes

Assets Risk Weighted

Banking

Citizens Bancorp Inc

Yes

Assets Risk Weighted

Holding Company

Yes

Assets Risk Weighted

Banking

Esanda Finance Corporation Limited

Yes

Assets Risk Weighted

General Finance

ETRADE Australia Limited

Yes

Assets Risk Weighted

Online Stockbroking

PT ANZ Panin Bank

Yes

Assets Risk Weighted

Banking

ANZ Vientiane Commercial Bank Limited

Yes

Assets Risk Weighted

Banking

ANZ Guam Inc.

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 through its
wholly owned subsidiary, ANZ National Bank Limited (ANZ National), which is subject to minimum
capital requirements as set by the Reserve Bank of New Zealand (RBNZ). The RBNZ has adopted theBasel II framework, effective from 1 January 2008, and ANZ National has been accredited to use theadvanced approach for the calculation of credit and operational risk. However, ANZ National maintains
a buffer above the minimum capital base required by the RBNZ. This capital buffer has been
calculated via the Internal Capital Adequacy Assessment Process (ICAAP) undertaken for ANZ
National, to ensure ANZ National is appropriately capitalised under stressed economic scenarios.

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ANZ Basel II Pillar 3 disclosure

September 2010

ANZ established a licensed banking branch in New Zealand in January 2009. The branch structure
expands the range of funding options available to ANZ’s New Zealand business, but does not impact
the capital requirements of ANZ National.

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 2010 and September 2009: Nil).

Table 2

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 Risk Weighted Assets (RWA), with theresultant 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 thedenominator.
APRA determines PCRs for Tier 1 and Total Capital at both Level 1 and Level 2 under its prudential
standards APS 110 – Capital Adequacy and APS 111 – Capital Adequacy: Measurement of Capital, with
RWA calculations predominantly contained in APS 113 – Capital Adequacy: Internal Ratings-based
Approach to Credit Risk, APS 115 – Capital Adequacy: Advanced Measurement Approach toOperational 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 dividends paid during the current year and the
expected dividend payments (net of the expected dividend reinvestment under the Dividend
Reinvestment Plan (DRP) and Bonus Option Plan (BOP)) 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 three outstanding Non-innovative hybrid Tier 1 capital instruments:•

ANZ Convertible Preference Shares. On 30 September 2008 ANZ issued AUD1,081 million of
convertible preference shares (CPS1) and on 17 December 2009 ANZ issued AUD1,969 million of
convertible preference shares (CPS2) that mandatorily convert into ordinary shares on 16 June2014 and 15 December 2016 respectively, subject to certain conditions being satisfied. They may
also convert earlier under certain circumstances. The distributions are preferred, non-cumulative,
payable quarterly and based on the quarterly Australian Bank Bill Rate plus a margin of 250 and
300 basis points respectively and are subject to Directors resolving to payable quarterly in theirabsolute discretion and other payment tests being satisfied. In a winding-up of ANZ, theconvertible 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 tocertain 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.
14ANZ Basel II Pillar 3 disclosure

September 2010

ANZ has on issue two Innovative hybrid Tier 1 capital instruments:•

US Trust Securities. On 27 November 2003, ANZ issued USD1,100 million of non - cumulative
trust securities in two tranches of USD350m with an initial call date of 15 January 2010 at a
coupon rate of 4.484%, and USD750m with an initial call date of 15 December 2013 and acoupon rate of 5.36%. On 15 January 2010, ANZ redeemed for cash the USD350m tranche of the
US Trust Securities. On 15 December 2013, ANZ has the right to redeem the USD750m trancheof 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 semi-annually. 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 AUD871m, 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 the 2010 ANZ Annual Report.
Tier 1 deductions include amounts deducted solely from Tier 1, mainly intangible assets i.e. goodwill,
acquired portfolio of insurance/investment business and capitalised software; capitalised brokerageand 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 andassociates 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.
ANZ has two instruments that qualify as Upper Tier 2 capital:•

USD300m note issued by ANZ on 30 October 1986 which pays a rate of 6 month LIBOR plus 15
basis points.

•

NZD835m note issued by ANZ National Bank Limited on 17 April 2008 which pays a fixed rate of
9.66% for five years payable semi-annually. At the first call date of 18 April 2013 the interest rate
resets to the five year swap rate plus 200 basis points, and is callable on any interest payment
date thereafter.

To qualify as Lower Tier 2 capital, the instrument must have a minimum term of five years and theamount 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, referto the Subordinated Notes section of the Loan Capital note (Note 27) in the 2010 ANZ Annual Report.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.

15

ANZ Basel II Pillar 3 disclosure

September 2010

Table 2: Capital Structure 5 6
The following table summarises ANZ’s Level 2 capital position as at 30 September 2010:
Regulatory Capital
March 2010
$M

September 2010
$M

September 2009$M

Tier 1 capital
Paid-up ordinary share capital
Foreign currency translation reserve
Share and share option reserve

20,140(2,742)
168

Reserves

19,563(2,381)156(2,574)19,064(1,725)156(2,225)(1,569)Retained earnings including current year earnings

15,921

14,62914,129less : Accumulated retained profits and reserves of insurance,
funds management and securitisation entities and associates
Dividend not provided for(1,312)(955)(1,010)(1,895)(1,318)(1,403)402

425

add : Deferred fee revenue including fees deferred as part of loan yields
Accrual for Dividend Reinvestment Plans

569

Prudential retained earnings

391

395

421

13,685

13,17664

66

65

31,31530,58030,088Innovative Tier 1 capital

1,646

1,690

2,122

Non-innovative Tier 1 capital

3,787

3,791

1,901

36,74836,061

34,111

Goodwill(2,910)(2,824)(2,999)Other deductions from Tier 1 capital only

(4,121)(3,779)(1,832)50/50 deductions from Tier 1 capital(3,026)(2,830)(2,661)(10,057)(9,433)(7,492)

26,691

26,62826,619Upper Tier 2 capital

1,226

1,060

1,392

Lower Tier 2 capital

6,644

7,430

9,108

Gross Tier 2 capital

7,870

8,490

10,500Minority interests
Fundamental Tier 1 capital

Gross Tier 1 capital

Deductions from Tier 1 capital
NET TIER 1 CAPITAL

12,528Tier 2 capital

Upper and lower Tier 2 capital deductions

(28)

(28)

(28)

50/50 deductions from Tier 2 capital(3,026)(2,830)(2,661)

Deductions from Tier 2 capital(3,054)(2,858)(2,689)NET TIER 2 CAPITAL

4,816

5,632

7,811

TOTAL CAPITAL BASE

31,50732,26034,430

Other Deductions from Tier 1 capital
Intangible component of investment in ING Australia and New Zealand(excluding prudential goodwill)(2,043)(1,961)-

Capitalised software and other intangible assets(1,169)(1,008)

(897)

(655)

(617)

(602)

(235)
(19)

(215)
22

(325)
12

-

(20)

(4,121)(3,779)(1,832)

Capitalised expenses including loan and lease origination fees, capitalised
securitisation establishment costs and costs associated with debt raisings
Applicable deferred tax assets (excluding the component relating to thegeneral reserve for impairment of financial assets)
Mark-to-market impact of own credit spread
Negative Available-for-sale reserve
Total

Deductions taken 50% from Tier 1 and 50% from Tier 2 capital

Gross

50%

Gross

50%

Gross

50%

Investment in ANZ insurance subsidiaries

(396)

(198)

(378)

(189)

(321)

(161)

Investment in funds management entities

(72)

(36)

(66)

(33)

(67)

(33)

Investment in ING Australia and New Zealand(1,690)(845)(1,268)(634)(1,474)(737)

Investment in other Authorised Deposit Taking Institutions and overseas
Investment in other commercial operations(1,976)
(42)

(988)
(21)

(1,962)
(72)

(981)
(36)

(1,951)
(72)

(976)
(36)

Expected loss in excess of eligible provisions(1,119)(560)(1,035)(518)(1,012)

(506)

Other

(756)

(378)

(878)

(439)

(424)

(212)

Total

(6,051)(3,026)(5,659)(2,830)(5,321)(2,661)

Details of Upper Tier 2 Capital
Eligible component of post acquisition earnings and reserves in associates
and joint ventures
Perpetual subordinated notes

946

General reserve for impairment of financial assets net of attributable
d f
d
Total

-

269

975

1,026

280

85

97

1,226

1,060

1,392

5

Under 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.

6“Investment in OnePath (formerly ING Australia) and ING New Zealand" were joint venture investments until
November 2009.

16

ANZ Basel II Pillar 3 disclosure

Table 3September 2010

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 27
for Tier 1 and Total Capital, and the US Federal Reserve’s minimum Tier 1 and Total Capital
adequacy requirements via ANZ’s Foreign Holding Company licence in the United States ofAmerica•

Capital levels are aligned with the risks in the business and to meet strategic and businessdevelopment plans through ensuring that available capital (i.e. shareholders’ equity including
preference shares and Residual Tier 1 capital) exceeds the level of Economic Capital required tosupport the Ratings Agency ‘default frequency’ confidence level for a “AA” credit rating categorybank. Economic Capital is an internal estimate of capital levels required to support risk andunexpected 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, theoutcomes of which are embodied in the Strategic Plan. This process involves forecasting key economic
variables which Business Units 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 thendetermined. 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 that
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, asset writing strategies and business strategies. It creates
greater understanding of the impacts on financial performance through modelling relationships
and sensitivities between geographic, industry and business unit exposures under a range ofmacro economic scenarios. ANZ has a dedicated stress testing team within Risk Management thatmodels and reports to management and the ANZ Board’s Risk Committee on a range of scenariosand stress 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; and•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 and maturity profile, options around capital products, timing and markets andstrategies 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.

7
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 andthe UK Financial Services Authority who may impose minimum capitalisation rates on those operations.

17

ANZ Basel II Pillar 3 disclosure

September 2010

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 wasdeveloped to ensure capital requirements are manageable and consistent with long term credit ratingsand 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 Core Tier-1 and Tier 1 capital ratios as its principal capital management targets
at Level 2. Given recent difficult economic and financial market conditions, ANZ has maintained bothratios well above its minimum target.

Regulatory change
The Basel Committee on Banking Supervision has released a series of consultation papers (Basel III)
containing a number of proposals to strengthen the global capital and liquidity framework to improvethe banking sector’s ability to absorb shocks arising from financial and economic stress.
The consultation papers aim to increase the quality, quantity, consistency and transparency of thecapital base, whilst strengthening the risk coverage of the capital framework by:•

Increasing the minimum level of capital, with new minimum capital targets for Core Tier 1(4.5%), Tier 1 (6.0%) and Total Capital (8.0%) to be phased in between 2013 and 2015;•

Increasing the capital buffers that banks are required to hold for stress scenarios and to dampen
the impact of pro-cyclical elements of the prudential regulators. A capital conservation buffer of
2.5% and a counter-cyclical buffer of 0.0% to 2.5% will be phased in between 2016 and 2019.
Failure to maintain the full capital buffers will result in limitations on the amount of current year
earnings that can be paid as discretionary bonuses and to Tier 1 and Tier 2 investors as couponsand capital returns;•

Increasing Tier 1 deductions, although a number of the proposals are consistent with the current
APRA prudential standards;•

Increasing the focus on Fundamental Tier 1 capital and tightening the regulations for Residual Tier
1 and Tier 2 capital instruments including a proposal that at the time of ‘non-viability’, these
instruments will be written off, with any potential compensation for investors limited to an
issuance of ordinary shares. Existing Tier 1 and Tier 2 instruments that do not have theserequirements will be phased out between 2013 and 2022. these proposals are to besupplemented, by yet to be released details around ‘contingent capital’ and ‘bail in’ instruments,
which may not initially be prudential capital, but are converted in part or in full into Fundamental
Tier 1 capital at predetermined trigger points;•

Supplementing the risk adjusted capital ratio targets with the introduction of a minimum leverage
ratio (Tier 1 capital divided by adjusted total assets including off balance sheet exposures) of
3.0% between 2013 and 2018.

•

Introducing measures (yet to be released) to address the impact of system risk and interconnectedness risk;•

Improving transparency of reporting capital ratio calculations in the financial statements; and•Increasing the capital requirements for traded market risk, credit risk and securitisationtransactions.

The Basel Committee is expected to finalise the majority of the reforms by the end of 2010, for
implementation between 2012 and 2019. Following the release of the final reforms by the BaselCommittee, ANZ expects APRA to engage the Australian banking and insurance industry ahead of thedevelopment and implementation of revised Australian prudential standards. It is not possible toaccurately determine the impacts associated with these reforms on ANZ, including revised operating
capital targets, until APRA’s position is finalised.

18

ANZ Basel II Pillar 3 disclosure

September 2010

Table 3: Capital Ratios and Risk Weighted Assets8 9 10
Risk Weighted Assets
September 2010
$M

March 2010
$M

September 2009
$M

Subject to Advanced IRB approach
Corporate

101,940

100,945

116,153

Sovereign

2,720

2,470

1,408

Bank

6,135

5,108

5,592

Residential Mortgage

38,70837,42336,725

Qualifying revolving retail

7,205

7,238

6,852

Other retail

17,89917,942

17,108Credit risk weighted assets subject to Advanced IRB approach

174,607

171,126

183,838

Credit Risk Specialised Lending exposures subject to slotting criteria

26,60524,96524,272

Corporate

21,281

16,33013,163

Sovereign

-

-

-

Bank

-

-

-

567

399

411

Subject to Standardised approach

Residential Mortgage
Qualifying revolving retail

1,841

4

-

Other retail

1,113

560

382

24,802

17,293

13,956

Credit risk weighted assets subject to standardised approach
Credit risk weighted assets relating to securitisation exposures

2,091

1,975

2,658

Credit risk weighted assets relating to equity exposures

1,577

1,639

1,914

Other assets
Total credit risk weighted assets

3,835

3,377

3,174

233,517220,375

229,811

Market risk weighted assets

5,652

3,969

3,553

Operational risk weighted assets

17,383

16,481

16,240Interest rate risk in the banking book weighted assets

7,690

8,136

2,465

264,242

248,961

252,069

Level 2 Total capital ratio

11.9%

13.0%

13.7%

Level 2 Tier 1 capital ratio

10.1%

10.7%

10.6%

Level 1: Australia and New Zealand Banking Group Limited extended licensed entity Total capital ratio

12.3%

13.7%

14.2%

Level 1: Australia and New Zealand Banking Group Limited extended licensed entity Tier 1 capital ratio

11.0%

11.9%

11.6%

Other significant ADI or overseas bank subsidiary: ANZ National Bank Limited Group Total capital ratio

13.1%

13.2%

12.7%

Other significant ADI or overseas bank subsidiary: ANZ National Bank Limited Group Tier 1 capital ratio

9.7%

9.5%

9.0%

TOTAL RISK WEIGHTED ASSETS
Capital ratios (%)

Risk Weighted Assets (RWA)
Total RWA increased by $12.2 billion (4.8%) in Full Year September 2010, mainly due to an increasein Interest Rate Risk in the Banking Book of $5.2 billion (212.0%).

Credit Risk Weighted Assets
The key drivers of the increase in Credit RWA were (i) an increase in Standardised RWA of $10.8
billion (77.7%) due to the acquisition of certain Royal Bank of Scotland (RBS) assets in Asia as well as
growth in our existing Asian businesses, (ii) an increase in IRB Specialised Lending Slotting of $2.3
billion (9.6%) mainly due to growth in exposures, (iii) an increase in IRB Retail Mortgages of $2.0
billion (5.4%) driven by a combination of growth and risk in the portfolio, and offset by (iv) a decreasein AIRB Corporate RWA of $14.2 billion (12.2%) due to a reduction in risk in the asset class and ongoing data review.

Market Risk, Operating Risk and IRRBB Risk Weighted Assets
Interest Rate Risk in the Banking Book and Market Risk RWA grew significantly over the year. IRRBB
grew by $5.2 billion (212.0%) as a result of a reduction in embedded gains and increased repricing
and yield curve risk. Market Risk grew $2.1 billion (+59.1%) due to growth in the global rates tradingbusiness.

8
Specialised Lending subject to supervisory slotting approach exposures are those where the main servicing andrepayment is from the asset being financed, and includes specified commercial property development/investment
lending, project finance and object finance.
9
ANZ National Bank Limited’s capital ratios have been calculated in accordance with Reserve Bank of New Zealandprudential standards.
10

Certain September 2009 and March 2010 comparatives throughout this disclosure have been restated to reflect
minor reclassifications of exposure between asset classes.

19

ANZ Basel II Pillar 3 disclosure

September 2010

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 & equity manager facilities
Retail managed consumer credit card exposures with customer limits less than
$100K
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 financeSovereignBank

Residential
Mortgages
Qualifying Revolving
RetailOther RetailSpecialised Lending
subject toSupervisory Slotting
approachStandardised
Securitisation
EquityOther Assets

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

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 Core Tier 1, Tier 1 and Total Capital adequacy ratios under UK rules (set by the
Financial Services Authority (FSA):

ANZ under APRA rules

ANZ under
FSA rules

Sep-09Mar-10

Sep-10

Sep-10 pro
forma*

Core Tier-1*

9.0%

8.5%

8.0%

11.3%

Tier-1

10.6%

10.7%

10.1%

13.5%

Total Capital

13.7%

13.0%

11.9%

15.2%

Capital ratio* ‘Core Tier 1’ = Tier 1 excluding Residual Tier 1 instruments

20

ANZ Basel II Pillar 3 disclosure

September 2010

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;•

Allows the comparison of Expected Loss to Eligible Provisions for Loan Loss to be made on a grossbasis and any excess is then tax effected, whereas APRA require Expected Losses 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; and•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 Interest Rate Risk in the Banking Book to be a Pillar I requirement so it is
excluded from prudential capital adequacy ratios; and•Differences in the treatment of specialised property lending, equity and margin lending products.

The Australian Bankers’ Association (ABA) has released a detailed fact sheet11 documenting thedifferences between the Australian and UK rules and the implications for prudential capital ratios.

11

bankers.asn.au

21

ANZ Basel II Pillar 3 disclosure

September 2010

Chapter 5 – Credit risk
Summary of Credit risk disclosures12 13
September 2010

Corporate (incl. Specialised Lending)

Risk Weighted Assets$M

Regulatory Credit
Exposure$M

Individual provision
charge for the twelve
months ended$M

Write-offs for thetwelve months ended$M
916

128,545

186,059

1,007

Sovereign

2,720

35,099

-

-

Bank

6,135

32,681(23)

8

Residential Mortgage

38,708220,055

162

117

Qualifying Revolving Retail

7,205

20,764

216

262

Other Retail

17,89928,282302

330

Standardised

24,802

25,71410660

226,014548,654

1,770

1,693

Total

March 2010

Corporate (incl. Specialised Lending)

Risk Weighted Assets$M

Regulatory Credit
Exposure$M

Individual provision
charge for the six
months ended$M

Write-offs for thesix months ended$M
575

125,910

181,978625

Sovereign

2,470

34,786

-

-

Bank

5,108

27,952(18)

8

Residential Mortgage

37,423

208,508

97

52

Qualifying Revolving Retail

7,238

20,396

107

128

Other Retail

17,942

28,250162

174Standardised

17,29318,03053

25

213,384

519,900

1,026

963

Total

September 2009

Corporate (incl. Specialised Lending)

Risk Weighted Assets$M

Regulatory Credit
Exposure$M

Individual provision
charge for the twelve
months ended$M

Write-offs for thetwelve months ended
$M
1,100

140,425

188,067

1,766

Sovereign

1,408

28,618

-

-

Bank

5,592

29,44445

27

Residential Mortgage

36,725201,581162

46

Qualifying Revolving Retail

6,852

19,820228

262

Other Retail

17,10828,651

459

415

Standardised

13,956

14,69690

39

222,066

510,877

2,750

1,889

Total

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 Capital Adequacy: Internal Ratings-Based Approach to Credit Risk. There are
however several small portfolios (mainly retail and local corporates in Asia Pacific) where ANZ applies

12

Regulatory credit exposure in this table includes Advanced IRB, Specialised Lending and Standardised exposures,
however does not include Securitisation, Equities or Other Assets exposures. Specialised Lending is included in the
Corporate asset class. Regulatory Credit Exposure in Tables 4 and 6 is net of credit risk mitigation such as
guarantees, credit derivatives, netting and financial collateral.

13

The Individual Provision charge relates to loans and advances, and does not include impairment on Available-ForSale assets of $1 million in September 2009 (March 2010: $20 million; September 2009: Nil).

22

ANZ Basel II Pillar 3 disclosure

September 2010

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
and procedures cover all aspects of the credit life cycle such as transaction structuring, risk grading,initial approval, ongoing management and problem debt management, as well as specialist policy
topics. The effectiveness of the credit risk management framework is assessed through various
compliance and monitoring processes. These, together with portfolio selection, define and guide thecredit process, organisation and staff.
Organisation
As described in Chapter 3, the Credit and Market Risk Committee (CMRC) is ANZ’s most senior
executive level credit risk committee. The Credit Ratings System Oversight Committee supports theCMRC, by providing group-wide scrutiny of ANZ’s 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 theChief Risk Officer, 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,and development 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. For retail lending, highly automatedrisk assessment processes mean that sole credit discretions are the norm, with assessors reviewing
the output of decision tools. Individuals must complete appropriate ongoing accreditation training inorder to be granted and retain a credit discretion. Credit discretions are reviewed on an annual basis,and may be varied based on the holder’s performance.
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; and•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, Expected Loss, regulatory
RWA and regulatory Expected Loss;•

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

Validating rating/scoring tools and credit estimates; and•Ongoing review and refinement of ANZ's credit risk measurement and policy framework.

23

ANZ Basel II Pillar 3 disclosure

September 2010

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 exposure at default, portfolio mix, risk grade profiles and migrations, risk
weighted assets, large exposure reporting, credit watch and control lists, impaired assets andprovisions. Within the retail segments, monthly reporting packs are prepared that focus on suchaspects as scoring and delinquency/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.
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 pay14 its credit obligations to ANZ in full, without
recourse by ANZ to actions such as realising available security; and•The obligor is at least 90 days past due on a credit obligation to ANZ.

Restructured items
Restructured items are facilities in which (1) the original terms have been modified to provide forconcessions of interest, or principal, or other payments due, or for an extension in maturity for a noncommercial period for reasons related to the financial difficulties of a customer, and (2) are notconsidered impaired. Restructured items may include both on and off balance sheet exposures.
Impaired assets
Irrespective of whether a facility is 90 days past due, individually managed facilities are classified as
impaired when there is doubt as to whether the contractual amounts due, including interest and otherpayments, will be met in a timely manner. Impaired assets include a credit valuation adjustment(CVA), which is a market assessment of the credit risk of the relevant counterparties.
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.
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

14

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.

24

ANZ Basel II Pillar 3 disclosure

September 2010

experience for assets with credit risk characteristics similar to those in the collective pool and includes
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 Probability of Default (PD), Loss Given
Default (LGD) and Exposure at Default (EAD)15. ANZ uses slightly different PD, LGD and EAD factors
in the calculation of regulatory capital and expected loss (EL), due to the 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; and•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 test16.
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
to the classification of collectively assessed provisions on defaulted accounts. The disclosures in thisdocument are based on Individual Provision and Collective Provision, for ease of comparison withother published results.

Table 4(b) part (i): Period end and average regulatory credit exposure 17 18
Regulatory Credit Exposure
September 2010
$M

March 2010
$M

September 2009
$M

Average for year
$M

Corporate

179,506

171,447

176,039

177,773

Sovereign

35,09934,786

28,61831,859Bank

32,681

27,95229,44431,063

Residential Mortgage

221,534

209,643

202,731

212,133

Qualifying Revolving Retail

22,605

20,40019,82021,213

Other Retail29,394

28,81029,03329,214

Specialised Lending

27,835

26,86225,192

26,514

548,654519,900

510,877

529,766

Portfolio Type

Total Exposure

15

PD, LGD and EAD are explained in the following section.

16

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.
17

In accordance with APS 330, regulatory credit exposure throughout Table 4 includes Advanced IRB, Specialised
Lending and Standardised exposures, however does not include Securitisation, Equities or Other Assets exposures.
Specialised Lending is included within Corporate asset class.

18

Average for the year represents simple average of this year and prior year exposures.

25

ANZ Basel II Pillar 3 disclosure

September 2010

Table 4(b) part (ii): Regulatory credit exposure by facility type

Regulatory Credit Exposure
September 2010
$M

March 2010
$M

September 2009
$M

Average for year
$M

Acceptance

11,495

12,51013,762

12,628Cash and Liquid Assets

11,353

13,521

18,402

14,878Contingents, Commitments, Other off B/S

110,437

103,868

103,557

106,997

Facility Type

Creditors & Other Liabilities
Derivatives

96

41

378

237

21,92914,151

13,912

17,921

Due from Other Financial Institutions

4,806

6,353

3,207

4,007

Investment Securities

19,501

16,381

14,75817,130Loans & Advances

346,177

330,963326,272

336,225

1,485

582

432

959

55

234

240

148

Other Assets
Total Deposits & Other Borrowings
Trading Securities

21,32021,296

15,957

18,639Total Exposures

548,654519,900

510,877

529,766

Table 4(c): Geographic distribution of regulatory credit exposure 19
September 2010

Corporate

Australia$M
105,484

New Zealand$M
37,698Other$M
36,324

Total$M
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

Corporate

Australia$M
103,519

New Zealand$M
38,761

Other$M
29,167

Total$M
171,447

Sovereign

12,542

6,879

15,36534,786Bank

12,031

2,630

13,291

27,952

Residential Mortgage

166,496

42,0691,078

209,643

Qualifying Revolving Retail

20,396-

4

20,400

Other Retail

21,325

6,908

577

28,810Specialised Lending

21,014

5,381

467

26,862

Total exposures

357,323

102,628

59,949519,900

Australia$M
105,615

New Zealand$M
41,975

Other$M
28,449Total$M
176,039

Sovereign

8,445

6,086

14,08728,618Bank

13,3793,087

12,97829,444

Residential Mortgage

157,118

44,521

1,092

202,731

Qualifying Revolving Retail

19,820--19,820

Other Retail

21,1887,421

424

29,033Specialised Lending

18,7905,980

422

25,192

Total exposures

344,355

109,070

57,452510,877

Portfolio TypeMarch 2010
Portfolio Type

September 2009
Portfolio Type
Corporate

19

Other geography comprises ANZ’s operations in Asia Pacific, Europe and America.

26

ANZ Basel II Pillar 3 disclosure

September 2010

September 2010

Table 4(d): Industry distribution of regulatory credit exposure 20 21
September 2010
Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Entertainment,
Leisure &Tourism$M

Corporate

34,876

7,815

5,742

9,045

16,395

Sovereign

28

1

20

98

16,477

Bank

-

-

4

-

32,430Residential Mortgage

-

-

-

-

-

Portfolio Type

Qualifying Revolving Retail
Other RetailSpecialised Lending
Total exposures% of Total

Financial, Government andInvestment &Official
Insurance
Institutions$M$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

15,91911,707

8,045

21,672

179,506

2

-

28

741

35,099

16

35

-

26

170

32,681

-

-

-

-

-

221,534

Property
Services Wholesale Trade$M$M

Manufacturing$M

Personal$M

1,348

28,603

2,557

15,782

17,101

255

196

152

-

-

-

-

-

221,534

-

-

-

-

-

-

-

22,605

-

-

-

-

-

22,605

2,335

1,709

2,381

762

301

9

838

14,839

902

604

1,908

1,012

1,794

29,394

187

-

430

154

254

-

236

-

22,461

-

-

1,915

2,198

27,83537,426

9,525

8,577

10,05965,85718,45829,932

261,731

39,313

16,56013,615

11,026

26,575548,654

6.8%

1.7%

1.6%

1.8%

12.0%

3.4%

5.5%

47.7%

7.2%

3.0%

2.5%

2.0%

4.8%

100.0%

Property
Services Wholesale Trade$M$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

March 2010
Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Entertainment,
Leisure &Tourism$M

Corporate

33,148

7,782

5,629

8,937

14,801

Sovereign

33

-

21

-

17,929

Bank

-

-

-

-

27,648Residential Mortgage

-

-

-

-

-

Portfolio Type

Qualifying Revolving Retail
Other retailSpecialised Lending
Total exposures% of Total

Financial, Government andInvestment &Official
Insurance
Institutions$M$M

Manufacturing$M

Personal$M

1,368

26,9982,101

13,69915,663

11,614

7,575

22,132

171,447

15,854

201

73

43

-

-

-

632

34,786

-

62

-

-

72

-

64

106

27,952--

209,643

-

-

-

-

-

209,643

-

-

-

-

-

-

-

20,400

-

-

-

-

-

20,400

2,319

1,691

2,380

753

304

8

821

13,922

891

595

1,868

1,072

2,186

28,810

288

-

60

155

407

-

250

-

21,141

-

-

2,086

2,475

26,86235,788

9,473

8,090

9,845

61,08917,23028,332

246,139

35,774

16,33013,482

10,797

27,531

519,900

6.9%

1.8%

1.6%

1.9%

11.8%

3.3%

5.4%

47.3%

6.9%

3.1%

2.6%

2.1%

5.3%

100.0%

Property
Services Wholesale Trade$M$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

8,112

19,921

176,039
28,618September 2009
Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Entertainment,
Leisure &Tourism$M

Corporate

32,234

8,383

5,243

9,223

Sovereign

Portfolio Type

Financial, Government andInvestment &Official
Insurance
Institutions$M$M

Manufacturing$M

Personal$M

15,3681,509

28,283

2,232

17,406

15,773

12,352

34

-

22

-

18,285

9,889

173

-

23

13

-

-

179

Bank

-

-

58

98

29,039

-

56

-

-

1

-

105

87

29,444

Residential Mortgage

-

-

-

-

-

-

-

202,731

-

-

-

-

-

202,731

Qualifying Revolving Retail
Other RetailSpecialised Lending
Total exposures% of Total

-

-

-

-

-

-

-

19,820

-

-

-

-

-

19,820

2,380

1,661

2,329

773

312

13

851

13,838

887

610

1,867

1,102

2,410

29,033

246

-

401

152

412

33

298

-

20,120

-

-

1,196

2,334

25,192

34,894

10,044

8,053

10,246

63,416

11,44429,661

238,621

38,436

16,397

14,21910,51524,931

510,877

6.8%

2.0%

1.6%

2.0%

12.4%

2.2%

5.8%

46.7%

7.5%

3.2%

2.8%

2.1%

4.9%

100.0%

20
Property Service includes Commercial property operators, Residential property operators, Retirement village operators/developers, Real estate agents, Non-financial asset investors and Machineryand equipment hiring and leasing.
21

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

27

ANZ Basel II Pillar 3 disclosure

September 2010

Table 4(e): Residual contractual maturity of regulatory credit exposure 22

September 2010

Portfolio Type<= 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

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

March 2010

Portfolio Type<= 12 mths
$M

1 ~ 5 years$M>5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

78,241

73,191

19,650365

171,447

Sovereign

13,043

18,675

3,068-

34,786

Bank

18,688

9,124

140

-

27,952

Residential Mortgage

1,793

4,347

176,859

26,644

209,643

Qualifying Revolving Retail

-

-

-

20,40020,400

Other Retail

9,808

13,0145,414

574

28,810Specialised Lending

9,942

13,3603,536

2426,862

131,515

131,711

208,667

48,007519,900

Total exposures

September 2009

Portfolio Type<= 12 mths
$M

1 ~ 5 years$M>5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

76,85579,19819,581405

176,039

Sovereign

9,443

17,4881,687-

28,618Bank

19,767

9,528

149

-

29,444

Residential Mortgage

1,897

4,682

170,337

25,815

202,731

Qualifying Revolving Retail

-

-

-

19,82019,820

Other Retail

10,354

13,053

5,117

509

29,033Specialised Lending

10,99010,983

3,219-

25,192

Total exposures

129,306

134,932

200,090

46,549510,877

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

28

ANZ Basel II Pillar 3 disclosure

September 2010

Table 4(f) part (i): Impaired assets, Past due loans23, Provisions and Write-offs by Industry
sector 24 25

September 2010
Individual provision
chargefor the six months
ended
$M

Write-offs
for the six months
ended
$M

Impairedderivatives$M

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Agriculture, forestry, fishing & mining

2

1,197

165

217

72

35

Business Services

-

218

50

102

14

21

Construction

-

98

35

44

23

47

Entertainment Leisure & Tourism

-

49

9

21

5

5

Financial, Investment & Insurance

-

448

11

96

15

80

Industry Sector

Government & Official Institutions

-

-

-

Manufacturing

2

402

22

197

2

31

Personal

-

1,084

1,057

611

311

341

41

1,831

88

257

140

72

-

171

37

79

23

12

80

23

Property Services
Retail Trade

38

-

-

10

9

Wholesale Trade

-

353

18

101

11

14

Other

6

578

40

112

118

63

Total

51

6,510

1,555

1,875

744

730

Individual provisionbalance$M

Individual provision
chargefor the six months
ended
$M

Write-offs
for the six months
ended
$M

Transport & Storage--

Individual provisionbalance$M

March 2010

Impairedderivatives$M

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Agriculture, forestry, fishing & mining

4

934

164

170

89

3

Business Services

-

268

66

103

22

35

Construction

-

119

42

62

37

Entertainment Leisure & Tourism

-

38

11

23

9

2

Financial, Investment & Insurance

-

864

14

173

(1)

107

Industry Sector

14

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

3

559

28

185

94

128

Personal

-

780

996

373

334

306

48

1,755

102

207

201

190

Retail Trade

-

148

37

63

27

16

Transport & Storage

-

85

19

41

22

7

Wholesale Trade

-

255

18

84

60

67

Other

12

689

26

109

132

88

Total

67

6,494

1,523

1,593

1,026

963

Individual provisionbalance$M

Individual provision
chargefor the six months
ended
$M

Write-offs
for the six months
ended
$M

19

18

Property Services

September 2009

Impairedderivatives$M

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Agriculture, forestry, fishing & mining

-

458

77

55

Business Services

-

215

41

114

77

60

Construction

-

122

43

43

31

29

Industry Sector

Entertainment Leisure & Tourism

-

57

42

27

5

7

Financial, Investment & Insurance

1

958

10

261

222

197

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

6

627

34

230

178

133

-

802

950

357

461

373

118

1,580

159

194

120

102

Retail Trade

-

114

53

53

33

34

Transport & Storage

-

85

31

32

24

5

Wholesale Trade

-

127

139

69

31

11

Personal
Property Services

Other

2

323

18

91

100

137

Total

127

5,468

1,597

1,526

1,301

1,106

23

Past due loans ≥ 90 days includes $1,416 million well secured loans (March 2010: $1,370 million; September
2009: $1,462 million).

24

Impaired derivatives include a credit valuation adjustment (CVA) of $77 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2010: $61 million; September 2009: $64 million).

25

Impaired loans / facilities include restructured items of $141 million for customer facilities in which the originalterms have been modified to provide for concessions of interest, or principal, or other payments due, or for an
extension in maturity for a non-commercial period for reasons related to the financial difficulties of a customer, andare not considered impaired. Includes both on and off balance sheet exposures (March 2010: $560 million;
September 2009: $673 million).

29

ANZ Basel II Pillar 3 disclosure

September 2010

September 2010

Table 4(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs 26
Individual
provision
charge$M

Individual
provisionbalance$M

Past dueloans ≥ 90days
$M

ImpairedLoans / Facilities$M

Impaired
Derivatives$M

Write-offs$M

Six months Twelve months Twelve months
ended
ended
ended
Mar-10
Sep-10
Sep-09Six months
ended
Sep-10Six months Twelve months Twelve months
ended
ended
ended
Mar-10
Sep-09Sep-10

Sep-10Mar-10

Sep-09Sep-10Mar-10

Sep-09Sep-10Mar-10

Sep-09Sep-10Mar-10

Sep-09Six months
ended
Sep-10

Corporate

51

67

127

4,840

5,325

4,499

298

338

398

965

1,016

1,022

382

1,766

341

Sovereign

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Bank

-

-

-

97

123

98

-

-

-

28

33

44

(5)

(18)

(23)

45

-

8

8

27

Portfolios subject to IRB
approach

Residential Mortgage

-

-

574

511

425

881

849

806

215

234

170

65

97

1,007

575

916

1,100

162

162

65

52

117

46

Qualifying revolving retail

-

-

-

-

-

-

84

78

70

-

-

2

109

107

216

228

134

128

262

262

Other retail

-

-

-

362

344

316

139

141

159

225

202

230

140

162

302

459

156

174

330

415

51

67

127

5,873

6,303

5,338

1,402

1,406

1,433

1,433

1,485

1,468

691

973

1,664

2,660

695

938

1,633

1,850

38

Total IRB approach-

625

Portfolios subject toStandardised approach
Corporate

-

-

-

298

144

81

97

94

144

156

77

29

14

28

42

86

1

1

2

Sovereign

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Bank

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Residential Mortgage

-

-

-

21

17

15

3

4

-

6

5

3

4

2

6

4

-

-

-

1

Qualifying Revolving Retail

-

-

-

106

-

-

13

-

20

106

-

-

(3)

-

(3)

-

7

-

7

-

Other Retail

-

-

-

212

30

34

40

19

-

174

26

26

38

23

61

-

27

24

50

-

Total Standardised approach

-

-

-

637

191

130

153

117

164

442

108

58

53

53

106

90

35

25

60

39

51

67

127

6,510

6,494

5,468

1,555

1,523

1,597

1,875

1,593

1,526

744

1,026

1,770

2,750

730

963

1,693

1,889

Total

26

Certain September 2009 and March 2010 comparatives in this table have been restated to reflect minor reclassifications of exposure between asset classes.

30

ANZ Basel II Pillar 3 disclosure

September 2010

Table 4(g): Impaired assets, Past due loans27, Provisions and Write-offs by Geography 28 29

September 2010
Geographic Region

Past dueloans ≥ 90 days
$M

Impaired derivatives Impaired loans/facilities$M$M

Individual
provision balance$M

Collective
provision balance$M

Australia

51

4,232

1,234

977

2,021

New Zealand

-

1,582

238

469

612

Other

-

696

83

429

520

Total

51

6,510

1,555

1,875

3,153

Past dueloans ≥ 90 days
$M

Individual
provision balance$M

Collective
provision balance$M

March 2010
Geographic Region

Impaired derivatives Impaired loans/facilities$M$M

Australia

67

4,441

1,162

1,009

2,013

New Zealand

-

1,424

286

471

672

Other

-

629

75

113

352

Total

67

6,494

1,523

1,593

3,037

Past dueloans ≥ 90 days
$M

Individual
provision balance$M

Collective
provision balance$M

September 2009
Geographic Region

Impaired derivatives Impaired loans/facilities$M$M

Australia

127

3,907

1,068

1,060

2,001

New Zealand

-

1,001

365

391

660

Other

-

560

164

75

339

Total

127

5,468

1,597

1,526

3,000

Table 4(h): Reconciliation of changes in Provisions

Collective Provision

Twelve months
ended
September 2010$M

Six months
ended
March 2010
$M

Twelve months
ended
September 2009
$M

Balance at start of period

3,000

3,000

2,821

Charge to income statement

(4)

36

235

Provisions acquired

240

49

-

Adjustments for exchange rate fluctuations

(83)

(48)

(56)

3,153

3,037

3,000

Balance at start of period

1,526

1,526

675

Charge to income statement for loans and advances

1,770

1,026

2,750

Total Collective Provision
Individual Provisions

Provisions acquired
Adjustments for exchange rate fluctuations
Discount unwind
Bad debts written-off
Recoveries of amounts previously written off

394

39

-

(100)

(32)

(22)

(165)

(61)

(73)

(1,693)(963)(1,889)

143

58

85

Total Individual Provision

1,875

1,593

1,526

Total Provisions

5,028

4,630

4,526

27

Past due loans ≥ 90 days includes $1,416 million well secured loans (March 2010: $1,370 million; September
2009: $1,462 million).

28

Refer to Page 25 for explanation and reconciliation of accounting Individual and Collective provisions andregulatory Specific provision and General Reserve for Credit Losses.

29

Other geography comprises ANZ’s operations in Asia Pacific, Europe and America.

31

ANZ Basel II Pillar 3 disclosure

September 2010

Table 4(i): Regulatory credit exposures by measurement approach

September 2010
$M

March 2010
$M

September 2009
$M

Corporate

158,224

155,116

162,875

Sovereign

35,09934,786

28,618Bank

32,681

27,95229,444

Residential Mortgage

220,055

208,508

201,581

Qualifying Revolving Retail

20,764

20,396

19,820

Other Retail28,282

28,25028,651

Total Advanced IRB

495,105

475,008

470,989

Specialised Lending (subject to slotting criteria)

27,835

26,86225,192

Corporate

21,282

16,331

13,164

Sovereign

-

-

-

Bank

-

-

-

Residential Mortgage

1,479

1,135

1,150

Qualifying revolving retail

1,841

4

-

Other retail

1,112

560

382

Total Standardised

25,714

18,03014,696

Total Exposure

548,654519,900

510,877

Advanced IRB

Standardised

Specific Provision Balance and General Reserve for Credit Losses 30

September 2010
$M
Specific
Provision
Balance

GeneralReserve for
CreditLossesMarch 2010
$M

Total

Specific
Provision
Balance

GeneralReserve for
CreditLosses

September 2009
$M

Total

Specific
Provision
Balance

GeneralReserve for
CreditLossesCollective Provision

233

2,920

3,153

260

2,777

3,037

186

2,814

Individual Provision

1,875

-

1,875

1,593

-

1,593

1,526

-

Total Provision for Credit Impairment

5,028

30

4,630

Total
3,000
1,526
4,526

Due to definitional differences, there is a difference in the split between ANZ’s Individual Provision and Collective
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 to the classification of collectively
assessed provisions on defaulted accounts. The disclosures in this document are based on Individual Provision andCollective Provision, for ease of comparison with other published results.

32

ANZ Basel II Pillar 3 disclosure

September 2010

Table 5Credit 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): Regulatory credit exposure by risk bucket 31

Risk weight

September 2010
$M

March 2010
$M

September 2009
$M

Standardised approach exposures
0%

-

-

-

20%

3

3

3

35%

1,177

1,125

1,130

50%

292

10

9

75%

1

-

1

100%

24,23916,892

13,553

150%

2

-

-

>150%

-

-

-

Capital deductions

-

-

-

25,714

18,03014,696

Total
Other assets
0%

-

-

-

20%

1,625

1,746

1,553

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

3,510

3,028

2,863

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

5,135

4,774

4,416

1,298

Total
Specialised Lending exposures subject to supervisory slotting
0%

1,660

1,817

70%

6,993

6,531

6,560

90%

12,026

11,296

9,770
5,943

115%

5,189

5,791

250%

1,968

1,427

1,621

Total

27,836

26,86225,192Equity exposures
Risk weight
300%

-

-

1

400%

394

410

478

Total

394

410

479

31

Standardised exposures to all private sector counterparties (other than banks and residential mortgages) havebeen classified in the Corporate category as they do not meet the requirements for other AIRB asset classes. The
main types of the exposures are Business Lending and Other Personal Lending.

33

ANZ Basel II Pillar 3 disclosure

Table 6

September 2010

Credit risk – Disclosures for portfolios subject to IRB
approaches

Portfolios subject to the 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

Sovereign

Central governments
Central banks
Certain multilateral development banks

AIRB

Bank

Banks32
In Australia only, other authorised deposit taking
institutions (ADI) incorporated in Australia

AIRB

Corporate

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

AIRB

Specialised Lending

Income Producing Real Estate33
Project FinanceObject Finance

AIRB – Supervisory
Slotting34

Residential
Mortgages

Exposures secured by residential property

AIRB

Qualifying Revolving
RetailConsumer credit cards <$100k limit

AIRB

Other Retail

Small business lending
Other lending to consumers

AIRB

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 expected loss
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
way of rating models used both at loan origination and for ongoing monitoring;•

EAD is defined as the expected facility exposure at the date of default; and32

The IRB asset class “Bank” excludes investment banks.

33

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

34

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

34

ANZ Basel II Pillar 3 disclosure•

September 2010

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
table demonstrates this alignment (for one year PDs):

ANZ CCR

Moody’sStandard &Poor’sPD Range

0+ to 1-

Aaa to <Aa3

AAA to <A+

0.00-0.03%

2+ to 3+

A1 to <Baa2

A+ to <BBB

0.03-0.16%

3= to 4=

Baa2 to <Ba1

BBB to <BB+

0.16-0.51%

4- to 6-

Ba1 to <B1

BB+ to <B+

0.51-3.49%

7+ to 8+

B1 to <Caa

B+ to <CCC

3.49-10.09%

8=

Caa

CCC

10.09-99.99%

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 two specialised PD master scales for the mapping of sovereign and bank PDs toexternal rating agency ratings.
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); and35

ANZ Basel II Pillar 3 disclosure•

September 2010

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 startingfrom the 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 of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australianresidential real estate and the mandatory use of the supervisory slotting approach for project financeand most commercial real estate exposures.
Controls surrounding the ratings system
ANZ’s rating system and credit risk estimates are governed by the Board’s Risk Committee andseveral executive management committees, and are underpinned by a comprehensive framework ofcontrols that operate throughout the organisation. 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 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; and•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 dual approval with the independent credit risk function. The significance of themodel 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.

36

ANZ Basel II Pillar 3 disclosure

September 2010

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

Borrower type

Rating Approach

Sovereign

Central governments
Central banks
Certain multilateral development banks

External rating and expert
judgement

Bank

Banks
In Australia only, other ADIs incorporated inAustralia

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

Corporate

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

Mainly statistical models
Some use of expert models andpolicy processes

Specialised Lending

Income Producing Real Estate
Project FinanceObject FinanceSupervisory Slotting35

Residential
Mortgages

Exposures secured by residential property

Statistical models

Qualifying Revolving
RetailConsumer credit cards <$100k limit

Statistical models

Other Retail

Small business lending
Other lending to consumers

Statistical models

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
is used as the basis for LGD estimation in the retail asset class, and is supplemented by external data
for the 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.

35

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.

37

ANZ Basel II Pillar 3 disclosure

September 2010

Table 6(d): Non Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach 36 37 38
September 2010

Regulatory credit exposure
Corporate

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

6,423

30,304

2,951

4,015

158,223

48,33559,584

6,611

Sovereign

30,545

2,271

40

1,981

260

-

2

Bank

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%

Corporate

1,455

15,973

15,872

10,690

666

339

159

45,154

Sovereign

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

46,49635,099Undrawn commitments (included in above)

Average Exposure At Default
Corporate

0.675

1.003

0.300

0.253

0.415

0.323

0.772

Sovereign

11.458

6.774

0.882

4.371

29.044

-

0.153

Bank

0.621

0.950

1.913

0.511

0.143

38.725

7.831

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%

Bank

62.7%

64.0%

63.7%

54.9%

61.4%

66.5%

64.2%

Corporate

18.4%

34.4%

50.4%

75.1%

129.2%

208.1%

162.3%

Sovereign

0.4%

2.0%

60.8%

110.4%

126.3%-

781.7%

Bank

13.8%

21.9%

58.9%

105.7%

205.6%

324.5%

160.5%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Regulatory credit exposure
Corporate

6,403

28,46845,85461,453

6,095

2,602

4,241

155,116

Sovereign30,821

1,919

145

1,589

310

-

2

34,786

Bank

24,928

1,557

865

472

12

13

105

27,952

Total

62,152

31,944

46,86463,514

6,417

2,615

4,348

217,854% of Total

28.5%

14.7%

21.5%

29.2%

2.9%

1.2%

2.0%

100.0%

Exposure-weighted average Loss Given Default (%)

Exposure-weighted average risk weight (%)

March 2010

Undrawn commitments (included in above)
Corporate

1,697

12,834

15,717

11,330

572

186

270

42,606

Sovereign

977

91

2

13

2

-

-

1,085

Bank

223

10

6

41

-

-

-

280

Total

2,897

12,935

15,725

11,384

574

186

270

43,971

Corporate

0.712

1.077

0.354

0.256

0.424

0.223

0.655

Sovereign14.608

6.280

5.625

7.736

20.796

0.000

0.162

Bank

0.947

0.923

0.696

0.410

0.219

0.362

7.012

Corporate

59.9%

58.9%

45.3%

38.2%

40.0%

39.3%

41.8%

Sovereign

2.5%

4.9%

58.7%

55.3%

41.7%

85.0%

59.0%

Bank

62.7%

63.2%

65.3%

67.0%

62.7%

74.7%

63.0%

Corporate

16.9%

33.5%

49.1%

78.3%

128.7%

180.9%

167.3%

Sovereign

0.5%

2.2%

68.9%

112.1%

124.8%

397.4%

781.7%

Bank

13.7%

22.3%

64.2%

117.7%

208.0%

349.0%

157.5%

Average Exposure At Default

Exposure-weighted average Loss Given Default (%)

Exposure-weighted average risk weight (%)

36

In accordance with APS 330, regulatory credit exposures in Table 6(d) include Advanced IRB; however do notinclude 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 is provided in Table 5(b).

37

Average Exposure at Default (EAD) is calculated as total EAD divided by the total number of credit risk generating
exposures.

38

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

38

ANZ Basel II Pillar 3 disclosure

September 2010

Table 6(d): Non Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach (continued)

September 2009
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Regulatory credit exposure
Corporate

6,543

28,63448,00565,423

6,622

3,720

3,928

162,875

Sovereign

25,610

1,691

94

1,218

1

1

3

28,618Bank

26,441

1,290

1,026

507

15

26

139

29,444

Total

58,594

31,61549,125

67,148

6,638

3,747

4,070

220,937% of Total

26.5%

14.3%

22.2%

30.4%

3.0%

1.7%

1.8%

100.0%

611

546

201

43,824

Undrawn commitments (included in above)
1,769

12,735

15,382

12,580

Sovereign

437

63

1

20

-

-

-

521

Bank

Corporate

256

6

8

5

-

-

-

275

Total

2,462

12,804

15,391

12,605

611

546

201

44,620

Average Exposure At Default
Corporate

0.790

1.467

0.577

0.336

0.514

0.329

0.651

Sovereign38.22313.421

8.502

10.884

0.072

0.344

0.179

Bank

9.955

1.101

1.362

0.509

0.374

13.8892.278

Corporate

59.6%

55.6%

47.8%

38.5%

43.6%

43.5%

47.0%

Sovereign

2.5%

4.8%

58.5%

56.7%

39.0%

2.0%

59.0%

Bank

62.0%

64.1%

60.7%

66.0%

58.8%

64.3%

42.0%

Corporate

17.9%

34.0%

55.0%

78.9%

142.7%

203.6%

259.0%

Sovereign

0.4%

1.9%

68.2%

98.4%

154.1%

11.5%

0.0%

Bank

13.4%

19.1%

57.8%

124.9%

195.9%

311.1%

340.9%

Exposure-weighted average Loss Given Default (%)

Exposure-weighted average risk weight (%)

Table 6(d): Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach by risk grade39
September 2010
0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

Regulatory credit exposure
Residential Mortgage

4,152

143,452

16,81743,586

6,174

4,294

1,581

220,056

Qualifying Revolving Retail

10,596

290

1,925

4,901

1,953

958

141

20,764

37

3,439

1,377

16,781

5,133

877

639

28,282

14,785

147,180

20,11865,26813,260

6,129

2,361

269,101

5%

55%

7%

24%

5%

2%

1%

100%

Other Retail
Total% of Total
Undrawn commitments (included in above)
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total

523

16,527

1,705

2,859

249

219

9

22,090

8,248

289

1,265

2,243

600

112

14

12,772

34

2,430

880

2,328

255

62

2

5,990

8,805

19,246

3,850

7,430

1,104

393

26

40,852Average Exposure At Default
Residential Mortgage

0.100

0.206

0.155

0.182

0.180

0.166

0.255

Qualifying Revolving Retail

0.011

0.006

0.010

0.009

0.008

0.007

0.008

Other Retail

0.006

0.010

0.011

0.014

0.009

0.007

0.035

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

22.7%

20.2%

20.4%

20.8%

20.3%

20.6%

21.6%

Qualifying Revolving Retail

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%

Exposure-weighted average risk weight (%)
Residential Mortgage

4.9%

7.1%

15.1%

28.7%

74.6%

113.6%

239.8%

Qualifying Revolving Retail

4.8%

11.3%

14.0%

38.7%

106.5%

205.7%

316.7%

Other Retail

18.4%

28.6%

38.2%

58.3%

76.4%

159.4%

199.4%

39

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

39

ANZ Basel II Pillar 3 disclosure

September 2010

Table 6(d): Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach by risk grade (continued)

March 2010
0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

Residential Mortgage

2,990

124,525

32,33537,732

Qualifying Revolving Retail

10,390

274

1,824

4,688

5,783

3,649

1,494

208,508

2,044

1,019

157

30

3,440

1,772

20,396

16,577

4,932

876

623

13,410128,239

28,25035,931

58,997

12,759

5,544

2,274

257,154

5.2%

49.9%

14.0%

22.9%

5.0%

2.2%

0.9%

100.0%

Regulatory credit exposure

Other Retail
Total% of Total
Undrawn commitments (included in above)
Residential Mortgage

381

14,107

2,816

2,482

235

91

10

20,122

8,068

274

1,194

2,151

628

128

25

12,468

26

2,283

1,174

2,121

262

55

7

5,928

8,475

16,664

5,184

6,754

1,125

274

42

38,518Residential Mortgage

0.037

0.202

0.220

0.177

0.172

0.172

0.258

Qualifying Revolving Retail

0.011

0.006

0.010

0.008

0.008

0.007

0.008

Other Retail

0.001

0.011

0.007

0.015

0.010

0.007

0.028

Qualifying Revolving Retail
Other Retail
Total
Average Exposure At Default

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

20.8%

20.0%

21.8%

20.6%

20.3%

20.5%

21.6%

Qualifying Revolving Retail

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

71.2%

61.4%

60.3%

44.4%

48.6%

65.1%

58.5%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.1%

6.8%

16.1%

30.3%

76.5%

113.5%

237.9%

Qualifying Revolving Retail

4.7%

11.0%

13.6%

38.1%

106.0%

205.2%

271.7%

Other Retail

18.1%

29.0%

41.7%

58.7%

76.5%

158.6%

209.7%

0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

Residential Mortgage

3,587

120,570

11,01656,097

5,327

3,574

1,410

201,581

Qualifying Revolving Retail

10,196

249

1,843

4,598

1,860

921

153

Other Retail

1,086

3,415

1,757

16,048

5,025

746

574

28,651

14,869124,234

14,61676,743

12,212

5,241

2,137

250,052

5.9%

49.7%

5.8%

30.7%

4.9%

2.1%

0.9%

100.0%

402

12,690

1,191

4,037

235

96

13

18,664

7,983

249

1,233

2,155

604

121

23

12,368September 2009

Regulatory credit exposure

Total% of Total

19,820

Undrawn commitments (included in above)
Residential Mortgage
Qualifying Revolving Retail
Other Retail

452

2,117

1,169

2,388

276

50

5

6,457

8,837

15,056

3,593

8,580

1,115

267

41

37,489Residential Mortgage

0.041

0.191

0.158

0.213

0.168

0.178

0.286

Qualifying Revolving Retail

0.011

0.006

0.010

0.008

0.008

0.007

0.008

Other Retail

0.086

0.010

0.006

0.014

0.011

0.007

0.027

Total
Average Exposure At Default

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

20.8%

20.1%

20.2%

21.4%

20.3%

20.6%

21.8%

Qualifying Revolving Retail

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

24.8%

56.5%

65.0%

45.5%

44.6%

61.4%

57.1%

Exposure-weighted average risk weight (%)
Residential Mortgage

4.6%

6.9%

14.4%

26.9%

77.9%

113.8%

241.5%

Qualifying Revolving Retail

4.8%

11.3%

13.9%

38.5%

106.9%

206.3%

275.0%

Other Retail

5.8%

26.3%

43.1%

60.2%

70.1%

147.1%

192.3%

40

ANZ Basel II Pillar 3 disclosure

September 2010

Table 6(e): Actual Losses by portfolio type 40

Six months ended
September 2010
Basel Asset Class

Individual provision charge$M

Write-offs$M

Corporate

382

Sovereign

-

341
-

Bank

(5)

-

Residential Mortgage

65

65

Qualifying Revolving Retail

109

134

Other Retail

140

156

Total Advanced IRB

691

695

53

35

744

730

Standardised
Total

Six months ended
March 2010
Basel Asset Class

Individual provision charge$M

Corporate

625

Sovereign
Bank

Write-offs
$M
575

-

-

(18)

8

Residential Mortgage

97

52

Qualifying revolving retail

107

128

Other retail

162

174

Total Advanced IRB

973

938

Standardised
Total

53

25

1,026

963

Six months ended
September 2009
Basel Asset Class

Individual provision charge$M

Write-offs$M

Corporate

731

Sovereign

-

671
-

Bank

41

(3)

Residential Mortgage

114

32

Qualifying revolving retail

120

138

Other retail

238

245

1,244

1,083

Total Advanced IRB
Standardised
Total

40

57

23

1,301

1,106

Charges for Individual Provision relate to loans and advances, and do not include impairment on available-for-saleof $1 million in September 2010 (March 2010: $20 million; September 2009: Nil)

41

ANZ Basel II Pillar 3 disclosure

September 2010

Table 6(f): Analysis of actual versus Expected Losses by portfolio type (Advanced AIRB) 41
September 2009

September 2010

One year expected loss (EL) estimates
Regulatory
EL estimate$M

Actual losses for 12 months ending September 2010

Write-offs$M

Individual provision charge
$M
1,007

Corporate

2,694

916

Sovereign

7

-

-

Bank

58

8

(23)

Residential Mortgage

561

117

162

Qualifying Revolving Retail

396

262

216

Other Retail
Total Advanced IRB

813

330

302

4,529

1,633

1,664

September 2008

September 2009

One year expected loss (EL) estimates
Regulatory
EL estimate$M

Actual losses for 12 months ending September 2009

Write-offs$M

Individual provision charge
$M
1,766

Corporate

1,686

1,100

Sovereign

10

-

-

Bank

91

27

45

Residential Mortgage

391

46

162

Qualifying Revolving Retail

363

262

228

Other Retail
Total Advanced IRB

510

415

459

3,051

1,850

2,660

Regulatory EL shown above represents estimated credit loss from defaults over a one year period(computed as the product of PD, LGD and EAD) plus Individual Provision as at 30 September 2009.
The actual loss measures are Charges for Individual Provision and Write-offs for the year ended 30
September 2010. While these metrics provide some insight into the predictive power of ANZ's
estimations, any comparison has limitations due to definitional differences - eg:•

The parameters PD, LGD and EAD underlying the Regulatory EL calculation represent through thecycle estimates based on APRA methodologies which include the use of the LGD floor for
Mortgages, slotting approach for project finance, object finance and non diversified 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 theIndividual Provision Charge and Write-Offs relate to a fluctuating portfolio and are recorded
throughout the year•

Charges for Individual Provisions represent an accounting estimate of likely losses on defaulted
exposures, whereas Write-offs are taken when defaulted exposures are assessed as partially or
fully uncollectable after the proceeds from any realisation of collateral have been taken into
account. There is typically a time lag between Charges for Individual Provisions and Write-offs.

Charges for Individual Provision exceeded Write-offs during the year because many of the defaults
that emerged during the year are still in the workout period where recovery options are being
identified and pursued.

41

Table 6(f) relates only to Advanced IRB and not Standardised, Equities, Securitisation or Other Assets.

42

ANZ Basel II Pillar 3 disclosure

Table 7

September 2010

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 obligations42. 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; and•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 procedures 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 Security Indicator 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.
guarantors are recognised for risk grade enhancement purposes.

Not all guarantees or

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.
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 in

42

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.

43

ANZ Basel II Pillar 3 disclosure

September 2010

exchange 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.

44

ANZ Basel II Pillar 3 disclosure

September 2010

Table 7(b): Credit risk mitigation – collateral 43 44
September 2010

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

-

-

-

-

0.0%
0.0%

Standardised

Bank

-

-

-

-

Residential Mortgage

1,479

-

-

1,479

0.0%

Qualifying revolving retail

1,841

-

-

1,841

0.0%

Other retail
Total

1,112

-

-

1,112

0.0%

26,482768-

25,714

2.9%

Other Eligible
Collateral$M

Total Exposure post
Credit Risk Mitigation$M% Coverage

March 2010

Exposure$M

Eligible Financial
Collateral$M

Corporate

16,831500-

16,331

3.0%

Sovereign

-

-

-

-

0.0%

Bank

-

-

-

-

0.0%

1,135

-

-

1,135

0.0%

4

-

-

4

0.0%

Standardised

Residential Mortgage
Qualifying revolving retail
Other retail
Total

560

-

-

560

0.0%

18,530500-

18,030

2.7%% Coverage

September 2009

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure post
Credit Risk Mitigation$M

Corporate

13,514350-

13,164

2.6%

Sovereign

-

-

-

-

0.0%
0.0%

Standardised

Bank
Residential Mortgage
Qualifying revolving retail
Other retail
Total

-

-

-

-

1,150

-

-

1,150

0.0%

-

-

-

-

0.0%

401

19

-

382

0.0%

15,065369-

14,696

2.4%

43

In order to show the cover provided by the disclosed mitigants, the exposure amount reported above is prior to
the application of eligible risk mitigation. Excluding these mitigants, the Standardised exposure amount is $25,714
million (March 2010: $18,030; September 2009: $14,696 million).

44

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

45

ANZ Basel II Pillar 3 disclosure

September 2010

Table 7(c): Credit risk mitigation – guarantees and credit derivatives 45 46
September 2010
Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M% Coverage

Corporate

192,037

16,497229

8.7%

Sovereign

25,365

30

-

0.1%

Bank

36,666

4,236

-

11.6%

Residential Mortgage

220,055

-

-

0.0%

Qualifying Revolving Retail

20,764--

0.0%

Other Retail28,281--

0.0%

523,168

20,763229

4.0%

Corporate

21,282--

0.0%

Sovereign

-

-

-

0.0%

Bank

-

-

-

0.0%

Residential Mortgage

1,479

-

-

0.0%

Qualifying Revolving Retail

1,841

-

-

0.0%

Other Retail

1,112

-

-

0.0%

25,714--0.0%

Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M% Coverage

Corporate

185,540

13,500378

7.5%

Sovereign

26,937

30

-

0.1%

Bank

32,617

4,970

-

15.2%

Residential Mortgage

208,508---

Qualifying Revolving Retail

20,396---

Other Retail28,250---502,248

18,500378

3.8%

Corporate

16,331---

Sovereign

-

-

-

-

Bank

-

-

-

-

1,135

-

-

-

4

-

-

-

Advanced IRB

Total
Standardised

Total

March 2010

Advanced IRB

Total
Standardised

Residential Mortgage
Qualifying Revolving Retail
Other Retail

560

-

-

-

18,030---

Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M% Coverage

Corporate

190,898

10,809779

6.1%

Sovereign

23,052

24

-

0.1%

Bank

32,959

3,933

-

11.9%

Residential Mortgage

201,582---

Qualifying Revolving Retail

19,820---

Other Retail

28,651---496,960

14,766779

3.1%

Corporate

13,164---

Sovereign

-

-

-

-

Bank

-

-

-

-

1,150

-

-

-

-

-

-

-

382

-

-

-

14,696

-

-

-

Total

September 2009

Advanced IRB

Total
Standardised

Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total

45

Table 7(c) shows the exposure amount by asset class prior to the impact of guarantees and credit derivatives.
Guarantee coverage for Corporate exposures can originate from Corporate, Sovereign or Bank counterparties. For
example, a Corporate exposure guaranteed by a Bank is shown above as a Corporate, however it will appear in othertables in this Pillar 3 disclosure as a Bank exposure i.e. post the effect of the guarantee.

46

The total exposure amount in Table 7(c) has been grossed up for the mitigant value of credit derivatives.

46

ANZ Basel II Pillar 3 disclosure

Table 8September 2010

General disclosures for derivatives and counterparty credit
riskDefinition of market-related counterparty credit risk
Market-related credit risk is present in market instruments (derivatives and forward contracts), andcomprises settlement risk (default at the end of the contract) and market replacement risk (default at
any time during the life of the contract).
••

Settlement risk 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 or due to timing differences when one counterparty performs its obligations at settlement
date but the other counterparty party fails to perform its payment obligation
Market replacement risk (pre-settlement risk) exposure is the risk that a counterparty will default
before expiry and final settlement of a derivative contract.

ANZ transacts market instruments with end user and professional counterparties. End users are
typically customers who require access to over the counter derivative market instruments to hedge
specific business risks to protect against price movement risk associated with their core businessactivity. ANZ provides end user counterparties with hedging instruments to manage price movement
risk. In turn, ANZ may seek to hedge out price movement risk including those arising from end user
related transactions by entering into transactions with professional counterparties that conduct twoway (buy and sell) business.
Market-related 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, credit default swaps, equities and commodities.
Market related counterparty credit risk governance
ANZ’s derivative and counterparty credit risk management is governed by credit principles, policies
and procedures. A Counterparty Credit Risk function is responsible for determining the counterparty
credit risk exposure methodology applied to derivatives, day-to-day capture of relevant transactions in
the counterparty credit limit management system and the calculation of counterparty credit risk.
Counterparty credit limits are approved by the Credit Approval Discretion (CAD) holder following thesame principles as on balance sheet credit limit approval process.
Market related counterparty credit risk measurement and reporting
For counterparty credit risk, the general approach is to calculate future exposure as the sum of themark-to-market value of the exposure, plus the sum of the notional principal multiplied by thepotential credit risk exposure (PCRE) for the exposure.
•

The mark-to-market value is the current replacement cost of the contract, and can be positive or
negative. ANZ measures counterparty credit risk exposure for positive mark to market positions.
If it is negative i.e. out of the money, ANZ will apply a factor (amount) to the negative value andif it still remains negative, the value used in the calculation is zero. Positive mark-to-market to
ANZ represents the cost of replacing an outstanding contract with a counterparty based on thecurrent market value of the contract if a counterparty defaulted on its obligations•

The PCRE factors recognise that prices may change over the remaining period to maturity, andthat 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•

The PCRE factors are also used by credit officers when establishing credit limits, to ensure thatcredit assessment recognises the potential volatility of the transactions’ values. In terms ofreporting, counterparty credit risk is calculated daily and excesses above approved limits arereported to account controllers and risk officers for action.

Credit Valuation Adjustment
ANZ uses a credit valuation adjustment (CVA) model to adjust the fair value of derivative instruments
over the life of the financial instrument to take into account the impact of counterparty credit quality.
This is undertaken by a present value of losses (PVL) methodology which calculates the present valueof expected losses over the life of the financial instrument as a function of probability of default, loss
given default, expected credit risk exposure and an asset correlation factor.
47

ANZ Basel II Pillar 3 disclosure

September 2010

Impaired derivatives are subject to a CVA which is based on an individual assessment of the expected
losses on the transaction.
Wrong way risk
ANZ’s management of counterparty credit risk also takes into consideration the possibility of wrong
way risk arising. Wrong way risk emerges when a counterparty’s probability of default is adversely
correlated with market risk factors. ANZ’s credit policies and transaction evaluation by credit risk arecentral in managing wrong way risk arising from derivative transactions, including credit derivatives.
These considerations are made as part of the independent transaction approval processes.
Counterparty credit risk mitigation
ANZ’s primary tools to mitigate counterparty credit risk are netting, collateral, structuring derivatives
with enhanced credit protection in master agreements and a rigorous control and reporting system.
Credit risk mitigation techniques:
•
•

•
•
•
•
•
•

A bilateral netting master agreement in the form of an ISDA or other ANZ approved netting
agreement allows close-out netting of in the money and out of the money exposures in a portfoliowith offsetting contracts, with a single net payment with the same legal counterparty.
In some transactions, ANZ or the counterparty may be required to lodge collateral. Standard
market documentation in the form of ISDA Master Agreement with Credit Support Annex governs
the amount of collateral required to be posted or received by ANZ and counterparty and the remargining frequency between counterparties. In some agreements the amount of collateralrequired and other terms may be linked to external credit ratings. This means that in the eventthat ANZ’s or a counterparty’s external rating was downgraded, ANZ or the counterparty would
likely be required to lodge additional collateral. The amount required to be lodged would depend
upon the underlying instruments and the state of the markets, so would be different at each remargining interval
Use of right to break clauses in master agreement or trade confirmation to reduce term of longdated derivative trades
Credit exposure control, monitoring and reporting of excesses against approved credit limits
Additional termination triggers such as credit rating downgrade clauses and change in ownershipclauses being including in documentation, resulting in close out of exposure if triggered
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- at 30 September 2010,
ANZ would not have been required to lodge additional collateral with its counterparties. A downgradeof two notches from AA to A+ would have required lodging of an additional USD 580 million.
The control system, with the system of counterparty limits and independent calculation and reportingof excesses, has been described above.

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ANZ Basel II Pillar 3 disclosure

September 2010

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 creditors47, 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 take many forms, and may be categorised as traditional or synthetic,
depending on legal ownership of the pool of assets:Traditional securitisations involve the legal transfer of ownership of the underlying asset pool intoa Special Purpose Vehicle (SPV), which finances the purchase by issuing debt instruments (notes)
to investors. The assets in the SPV are insulated from the bankruptcy of the seller or servicer of
those assets, and principal and interest are paid to the investors from realisation of or regularcash flows from those assets. The notes are commonly referred to as asset backed securities(ABS), and may take the form of residential mortgage backed securities (RMBS)

Synthetic securitisations also transfer the credit risk of the pool of assets to third parties, howeverlegal ownership of the assets remains with the originator. This transfer of credit risk may beachieved via funded structures (eg: credit-linked notes) or may be unfunded (eg: credit default
swaps, credit derivatives or guarantees).

Regulatory capital approaches used in ANZ’s securitisation activities
For securitisation exposures held in ANZ’s banking book48, ANZ applies an Internal Ratings-Basedapproach (as outlined in APS 120: Securitisation) to determine the regulatory capital charge related tobanking book securitisation exposures.
For securitisation exposures held in ANZ’s trading book, regulatory capital is calculated under market
risk approaches described in Chapter 7.
Securitisation activities
ANZ is involved in four main types of securitisation activities:


Securitisation of ANZ-originated assets - The securitisation of ANZ-originated assets provides
diversity in the funding base of ANZ. Such securitisations may or may not involve the transfer ofcredit risk and as such, may or may not provide regulatory capital reliefSecuritisation of third-party originated assets



Facilities and services provided to securitisations - ANZ provides various facilities tosecuritisations, including: liquidity, funding derivatives and/or credit support as well as services
such as structuring and arranging, conduit management and (via ANZ Capel Court Limited) trust
managementInvestment in securities - ANZ purchases notes issued from securitisation programs for trading or
liquidity purposes.

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, due to 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 require

47

APRA has extended the definition of securitisation in certain cases where only one tranche or class of creditors isserviced by the cash flow from the pool of assets.

48

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.

49

ANZ Basel II Pillar 3 disclosure

September 2010

joint risk and business approval.
The securitisation team must be involved in all non-trading
securitisation transactions, which ensures consistent expert treatment.
When ANZ is investing in securitisations, the Global Markets business manages them as they do forany other part of the trading or liquidity portfolios.
Risk measurement and reporting of securitisation exposures
In accordance with APS 120: Securitisation, ANZ has a hierarchy of approaches that can be used toquantify the credit risk of securitisation exposures in the banking book. The most common approach
used is the Internal Assessment Approach, whereby ANZ uses a rating agency-type methodology
which takes into account historical performance of assets and other (asset-specific) considerations
such as underwriting standards.
The rating derived from the above process is used with a conservative LGD and EAD for economic
capital.
All facilities for securitisation vehicles are reviewed at least annually, including the risk grade. ANZ
undertakes its own internal risk assessments for securitisation exposures and supplements thisassessment with external rating agency ratings and/or methodology.
The type and frequency of reporting for ANZ’s securitisation exposures is a function of the nature ofthose exposures:

Facilities to securitisation vehicles 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 Credit and Market Risk Committee on a sixmonthly basis. Utilisation of liquidity facilities are reported internally on a weekly basis



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

Accounting policies
Many securitisation structures will involve the creation of a securitisation SPV. Any SPV in which ANZ
has involvement is assessed for control under the requirements of AASB Interpretation 112
Consolidation – Special Purpose Entities, which is based on the concepts of risk and rewards. Where
control is determined to exist, the SPV is consolidated into ANZ’s financial statements.
This
assessment is performed regardless of whether the assets are ANZ or third-party originated. Financial
instruments held and issued either from SPVs which are consolidated by ANZ or those held or issued
to a non-consolidated SPV are recognised and valued using the principles of AASB 139 Financial
Instruments: Recognition and Measurement, depending on their nature.
Derecognition of any transferred ANZ originated assets is determined based on the derecognition
principles of AASB 139 using a risks and rewards model. 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 notretained.
In the case of a synthetic securitisation, any transferred credit exposure is recognised through the fairvalue 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. These rating agencies are all used across a variety of asset classes and securitisation
activities.

50

ANZ Basel II Pillar 3 disclosure

September 2010

Table 9(d): Traditional and synthetic securitisation exposures 49 50
September 2010
Traditional securitisations

Underlying asset

Regulatory credit
exposure

ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,908

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

September 2010
Synthetic securitisations

Regulatory credit
exposure

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

-

-

-

-

Underlying asset

September 2010
Aggregate of traditional and synthetic
securitisations

Regulatory credit
exposure

Underlying asset
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,908

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

March 2010
Traditional securitisations

Underlying asset
Residential mortgage

Regulatory credit
exposure

ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,626

242

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

870

Commercial loans

-

-

-

161

Other

-

-

-

3,626

Total

242

-

-

6,283

49

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.

50

Total regulatory credit exposure 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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ANZ Basel II Pillar 3 disclosure

September 2010

Table 9(d): Traditional and synthetic securitisation exposures (cont.)
March 2010
Synthetic securitisations

Regulatory credit
exposure
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

-

-

-

246

Total

-

-

-

246

Underlying asset

March 2010
Aggregate of traditional and synthetic
securitisations

Regulatory credit
exposure
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,626

Underlying asset

Residential mortgage

242

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

870

Commercial loans

-

-

-

161

Other

-

-

-

3,872

Total

242

-

-

6,529

September 2009
Traditional securitisations

Underlying asset

Regulatory credit
exposure

ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,782

Residential mortgage

284

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,057

Commercial loans

-

-

-

181

Other

-

-

-

4,410

Total

284

-

-

7,430

September 2009
Synthetic securitisations

Regulatory credit
exposure
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

-

-

-

1,065

Total

-

-

-

1,065

Underlying asset

September 2009
Aggregate of traditional and synthetic
securitisations

Regulatory credit
exposure
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided
$M
1,782

Underlying asset

Residential mortgage

284

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,057

Commercial loans

-

-

-

181

Other

-

-

-

5,475

Total

284

-

-

8,495

52

ANZ Basel II Pillar 3 disclosure

September 2010

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

Value as at 30 September 2010
ANZ originated$M
211

Impaired$M-

Past due$M-

Half Year
Losses recognised$M-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

211

-

-

-

ANZ originated$M
242

Impaired$M-

Past due$M-

Half Year
Losses recognised$M-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

242

-

-

-

Underlying asset
Residential Mortgage

Value as at 31 March 2010
Underlying asset
Residential Mortgage

Value as at 30 September 2009
Underlying asset

ANZ originated$M
284

Residential Mortgage

Impaired$M-

Half Year
Losses recognised$M-

Past due$M-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

284

-

-

-

Table 9(f): Securitisation – Regulatory credit exposures by exposure type 51

Regulatory credit exposure

Liquidity facilities

September
2010
$M
2,529

March
2010
$M
2,888

September
2009
$M
3,915

Funding facilities

3,006

Securitisation exposure type

2,549

3,034

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

25

26

59

Holdings of securities (excluding trading book)

319

626

1,561

Other

-

-

-

Total

5,422

6,574

8,541

Table 9(g): Securitisation – Regulatory credit exposures by risk weight band
September 2010

Securitisation risk weights

March 2010

September 2009

Regulatory credit
exposure$M

Risk weighted
assets$M

Regulatory credit
exposure$M

Risk weighted
assets$M

Regulatory credit
exposure$M

Risk weighted
assets
$M

3,230

369

4,772

517

6,206

627

>25 ≤ 35%

146

51

-

-

225

79

>35 ≤ 50%

20

10

20

10

26

13

>50 ≤ 75%

186

98

14

10

412

309

>75 ≤ 100%

1,482

1,482

1,388

1,388

1,630

1,630

>100 ≤ 650%

54

81

20

50

-

-

1250% (Deduction)

304

-

360

-

42

-

Total

5,422

2,091

6,574

1,975

8,541

2,658

≤ 25%

51

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

53

ANZ Basel II Pillar 3 disclosure

September 2010

Table 9(g): Securitisation – Regulatory credit exposures by risk weight band

September 2010
Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital$M-

Credit cards and other personal loans-

Auto and equipment finance-

Securitisation exposures deductedfrom Capital
Residential Mortgage

March 2010

September 2009

Total
$M
-

Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital
$M
-

Total
$M
-

Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital
$M
-

Total
$M
-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Other

152

152

305

180

180

360

21

21

42

Total

152

152

305

180

180

360

21

21

42

Commercial loans

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.

Table 9(j): Securitisation – Summary of current year’s activity by underlying asset typeand facility52

For the six months to 30 September 2010
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

971

-

Credit cards and other personal loans

-

139

-

Auto and equipment finance

-

830

-

Commercial loans

-

-

-

Other

-

152

-

Total

-

2,092

-

Securitisation activity by underlying asset type

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

52
“Third party originated” represents the total original assets of the securitisation, and is not representative of ANZ's
exposure.

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ANZ Basel II Pillar 3 disclosure

September 2010

Table 9(j): Securitisation – Summary of current year’s activity by underlying asset typeand facility
For the six months to 31 March 2010
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

505

-

Credit cards and other personal loans-

Auto and equipment finance--Commercial loans

-

-

Other

-

164

-

Total

-

669

-

Securitisation activity by underlying asset type-

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

229

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

-

Other

-

Total

229

For the six months to 30 September 2009
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

1,773

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

400

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

2,173

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities-

Underwriting facilities-

Lending facilities

59

Credit enhancements-

Holdings of securities (excluding trading book)

-

Other

-

Total

59

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ANZ Basel II Pillar 3 disclosure

September 2010

Chapter 7 – Market Risk
Table 11

Market risk – Internal Models Approach (IMA)

Definition and scope of market risk
Market risk is defined as the risk to ANZ’s earnings arising from changes in interest rates, foreignexchange rates and credit spreads, or from fluctuations in bond, commodity or equity prices.
Market risk arises through ANZ’s trading and balance sheet activities. This chapter focuses on market
risk arising from all traded positions including foreign exchange and commodity risks in the tradingbook and banking book. Chapter 10 deals with market risk management of interest rate in thebanking book.
Regulatory approval to use the Internal Models Approach
ANZ has been given approval by APRA to use the Internal Models Approach (IMA) under APS 116
Capital Adequacy: Market Risk for all trading portfolios except for specific interest rate risk, equity
trading and electricity trading. ANZ uses the Standardised Approach to market risk capital for thesethree subsets of market risk.
Governance of market risk
The Board’s Risk Committee oversight of market risk is supported by the Credit and Market Risk
Committee (CMRC) as described in Chapter 3.
The Market Risk function is a specialist risk management unit independent of the business that is
responsible for measuring and monitoring market risk, and has designed and implemented policies
and procedures to ensure that market risk exposures are managed within the appetite and limit
framework set by the Board.
Traded market risk
Management of traded market risk is governed by the Traded Market Risk Management Framework.
Key aspects of this framework include:•

A clear definition of the trading book•

A comprehensive set of market risk policies that promote the proactive identification andcommunication of risk•

A robust Value at Risk (VaR)
testing•

A comprehensive market risk limit framework that controls all material market risks•

An independent Market Risk function which actively monitors market risk exposure, compliancewith limits and risk policies, as well as the ongoing effectiveness and appropriateness of the risk
management framework•

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

quantification approach supplemented by comprehensive stressMeasurement 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 andsensitivities measures. 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 market risk capital. A 97.5% confidence level, one-day holding period VaRmeans that there is 97.5% chance that a loss will not exceed the VaR estimate on any given day. A
99% confidence level, ten-day holding period VaR means that there is 99% chance that a loss will not
exceed the VaR estimate over a period of 10 days, assuming no rebalancing of risk positions. All
material market risk factors and all trading portfolios (with the exception of interest rate risk – specificrisk, equities and electricity trading, for which capital is calculated using under the Standardised
Approach described in Table 10 below) are captured within the VaR model.

56

ANZ Basel II Pillar 3 disclosure

September 2010

VaR estimates and sensitivities alone is not a sufficiently reliable measure to estimate the maximum
loss ANZ could suffer in an extreme market event as it is driven by historical observations. To
complement VaR analysis, ANZ also undertakes a wide range of stress tests to the trading portfolio,
both on individual portfolios and at the Group level. Standard stress tests are applied on a daily basis
and measure the potential loss impact arising from applying the largest market movements during theprevious seven years over specific holding periods.
Holding periods used to calculate stressparameters differ and reflect the relative liquidity of each product type.
Plausible severe scenarios are developed with reference to past events impacting traded markets aswell as possible future events. Potential losses arising as a result of these scenarios are calculatedmonthly and reported to the CMRC.
VaR and stress tests are also supplemented by the cumulative loss limits and detailed control limits.
The cumulative loss limits ensure that in the event of continued losses from a trading activity, thetrading activity is stopped and senior management reviews the circumstances leading to the losses
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.
All VaR models used within ANZ for the purposes of measuring exposure against limits are evaluatedagainst actual and hypothetical profit and loss outcomes. Back testing is conducted daily, and outliers
are analysed to understand if the issues are the result of trading decisions, systemic changes inmarket conditions or issues related to the VaR model i.e. historical data or model calibration.
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:
Table 11(d): VaR Values over the reporting period 53 54

VaR over six months ended 30 September 2010
Value at Risk (VaR)
Equities

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

VaR over six months ended 31 March 2010
Value at Risk (VaR)
Equities

Mean
$M
-

Maximum$M-

Minimum$M-

Period end$M-Interest Rate

15.7

23.8

9.2

23.8

Foreign exchange

2.5

7.8

0.8

1.9

Commodity

2.1

3.2

0.9

2.1

Credit

3.0

4.9

1.7

4.4

VaR over six months ended 30 September 2009
Value at Risk (VaR)
Equities

Mean
$M
-

Maximum$M-

Minimum$M-

Period end$M-Interest Rate

6.6

10.8

2.4

9.6

Foreign exchange

2.1

4.6

0.9

3.5

Commodity

1.4

4.3

0.6

1.2

Credit

1.8

3.2

1.2

2.4

53

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

54

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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ANZ Basel II Pillar 3 disclosure

September 2010

Comparison of VaR estimates to actual gains/losses
Back testing involves the comparison of calculated VaR exposures with profit and loss data to identify
the frequency of incidents when trading losses exceed the calculated VaR. As a probabilistic measureof potential future gains or losses, it is expected that results exceed VaR a proportion of the time. For
APRA backtesting purposes, VaR is calculated at the 99% confidence interval with a one day holding
period. Therefore, over the long-run we would expect one back testing outlier every 100 days.
ANZ uses actual profit and loss data and hypothetical profit and loss data. Hypothetical profit and loss
data is designed to remove the impacts of intraday trading and sales margins. It is calculated as thedifference between the value of the prior day portfolio at prior day closing rates and the value atcurrent day closing rates. Markets Finance calculates actual profit and loss while Market Risk
calculates hypothetical profit and loss.
As at 31 September 2010, based on the prior 250 business days, there were zero hypothetical andzero actual genuine negative outliers, compared to zero hypothetical and 1 actual genuine negative
outliers as at 31 March 2010. This decrease in the number of hypothetical and actual genuine negative
outliers is in line with expectations as the high market volatility experienced from early 2008 has beenrolled out of the current historical VaR model while a reduction in market volatility throughout 20092010 has decreased the magnitude of daily actual and hypothetical profit and loss results. Considering
this the VaR model continues to be an appropriate model to use for Market Risk calculations.
Reporting of market risk
Market Risk conducts daily VaR and stress testing and reports the results to Market Risk management,
senior executives and trading management. In the event of breaches, Market Risk will escalate detailsof the breach to the appropriate discretion holder within Market Risk and Group Risk. All breaches arereported to CMRC on a monthly basis.
Market Risk monitors and analyses back testing results on a daily basis and reports quarterly results
to CMRC.
Mitigation of market risk
ANZ’s system of market risk quantification is fundamental to how market risk is mitigated. The
results are compared to established limits and breaches are reported immediately to management
who instruct on the appropriate action in accordance with authorised delegations. All breaches aresubsequently reported to senior executive Risk committees, i.e. CMRC.
The Market Risk group is also an important factor in how ANZ mitigates its market risk. It is a unit
independent of the dealing, processing/settlements operations and manages the day-to-day risk
management function. Market Risk group has presence in all the major dealing operations centres inAustralia, New Zealand, Asia, Europe and America.
Commodities risk
Commodity price risk arises as a result of movement in prices for various commodities. All exposures
to commodity prices are transferred to the trading book and centrally managed by the business andmonitored by the Market Risk function in accordance with the Traded Market Risk Management
Framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in relative values of various currencies. It
arises from ANZ’s operating business activities, trading activities and structural foreign exchange
exposures from foreign investments and capital management activities.
Foreign exchange exposures from ANZ’s normal operating business and trading activities are recordedin core multi-currency systems and managed within the trading book in accordance with the Traded
Market Risk Management Framework.
ANZ’s structural foreign exchange exposures are managed in accordance with the policies approved by
the Risk Committee of the Board, with the main objective of ensuring that ANZ’s capital ratio is largely
protected from the changes in foreign exchange. ANZ’s investment in ANZ National Bank in New
Zealand is the main source of the structural foreign exchange exposure.

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ANZ Basel II Pillar 3 disclosure

Table 10

September 2010

Market risk – Standardised Approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specificrisk55, equity trading and electricity trading risk factors. For internal purposes only ANZ also uses aninternal model for electricity and equities.
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 Approach 56
Capital requirements
September 2010
$M
126

March 2010
$M
121

September 2009$M
112

Equity position risk

8

2

3

Foreign exchange risk

-

-

-

Commodity risk

8

5

6

142

128

121

1,775

1,597

1,514

Market Risk under standardised approach
Interest rate risk

Total
RWA equivalent

55

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.

56

RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APRA Prudential Standard APS
110.32.

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ANZ Basel II Pillar 3 disclosure

September 2010

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 systems, or from external events. This definition includes legal risk, and therisk of reputational loss57, however excludes strategic risk.
Regulatory approval to use the Advanced Measurement Approach
ANZ has been granted approval by APRA to use the Advanced Measurement Approach (AMA) under
APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk. The approved
AMA applies across all of ANZ, and does not comprise partial use.
Operational risk governance and structure
The roles of ANZ Board Risk Committee and the Operational Risk Executive Committee (OREC) aredescribed in Chapter 3.
Group Operational Risk are responsible for exercising governance over operational risk through the
management of the operational risk framework, policy development, operational risk measurement
and capital allocation and reporting of operational risk issues to executive committees.
Divisional Risk Committees and Business Unit Risk Forums manage and maintain oversight ofoperational risks supported by thresholds for escalation and monitoring.
Business units are responsible for implementation of the operational risk framework, including theidentification, analysis, assessment and treatment of operational risks on a day-to-day basis.
Divisional Risk personnel provide oversight of operational risk management undertaken in thebusiness units..
Operational risk principles
ANZ has developed a comprehensive framework to manage operational risk which includes thefollowing operational risk management principles:•

Operational risk is recognised as a primary risk within ANZ and has a governance structure
responsible for maintaining oversight•

ANZ will create a culture that recognises operational risk as everyone’s responsibility with roles
and responsibilities clearly articulated at all levels in the organisation•

ANZ will create an environment for sound, transparent decision-making that includes a framework
to identify, assess, control and monitor ANZ’s operational risks•

Key decisions within ANZ will be informed by balancing operational risk with reward•

ANZ will continuously monitor the effectiveness and relevance of its framework for managing
operational risk•

ANZ will monitor its exposure to operational risk and changes to its operational risk profile•

ANZ will learn from losses arising from operational risk by identifying and improving theunderlying root cause.

The framework is supported by policies and guidelines.
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 Corporate Centre Governancefunctions, and the role of Internal Audit in the management of operational risk at ANZ.

57

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 reputational risk
considerations.

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ANZ Basel II Pillar 3 disclosure

September 2010

Day-to-day management of operational risk is the responsibility of business unit line management andstaff. This includes:•

Identification of potential risks•

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•

Maintaining risk registers and recording operational risk events and compliance incidents on the
ANZ loss event database.

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

Dedicated Divisional and Group Corporate Centre Risk Governance teams provide a support
monitoring and oversight function for divisions and business units, with Internal Audit providing
independent assurance and review.
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 APS115.
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’s operational risk management process includes the following activities: risk identification andevaluation; control self assessment, testing and remediation; risk mitigation tracking; internal loss
event capture, event case management and monitoring. Material risks and events (including actual
losses, near misses and breaches) are recorded and required to be escalated and reported to theappropriate level (either within the business, to Divisional Risk committee, CRO or the OREC) inaccordance with established risk appetite and reporting thresholds for risk acceptance, remediation
approval or tracking. In addition, Division Committees and OREC receive regular reporting on: trends,
change in risk profiles, results from reviews or specific test results, remediation tracking andmonitoring.
ANZ’s Advanced Measurement Approach
Group Operational Risk is responsible for maintaining ANZ’s Advanced Measurement Approach for
operational risk measurement and capital allocation.
ANZ uses a scenario based methodology to determine its operational risk regulatory capital. Thismethodology incorporates the use of business risk profiles which consider the current businessenvironment and internal control factors over a twelve month time horizon.
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.
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ANZ Basel II Pillar 3 disclosure

September 2010

Capital outcomes include:•

Operational Risk Regulatory Capital to meet the regulatory capital soundness standard based on a
99.9% confidence interval in accordance with APRA Prudential Standard 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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ANZ Basel II Pillar 3 disclosure

September 2010

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 Strategic Development, internal specialists and external
advisors, where appropriate. Board approval is required prior to committing to any
investments over delegated authorities, and all regulatory notification requirements are met.
Performance of these investments is monitored by both the owning business unit and Group
Strategic Development to ensure that it is within expectations and the values of theinvestments 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 book
The accounting treatment of equity investments, other than for joint ventures, depends on whether
ANZ has significant influence over the investee, as described in AASB 128 Investment in Associates.
Where significant influence is assessed, the investment is classified as an Investment in Associates in
the financial statements. ANZ adopts the equity method of accounting for associates and the Group’s
interest in joint venture entities. ANZ’s share of results of associates and joint venture entities is
included in the consolidated income statement. Shares in associates and joint venture entities arestated in the consolidated balance sheet at cost plus ANZ’s share of post acquisition net assets.
Interests in associates and joint ventures are reviewed annually for impairment, using either market
value, or a discounted cash flow methodology to assess value in-use.
In accordance with APS 111 Capital Adequacy: Measurement of Capital, equity accounted earnings
from strategic investments in joint ventures and partnerships are excluded from regulatory capital
until received in the form of a dividend.
Where ANZ does not have significant influence over the investee, the investment is classified as
Available For Sale. The investment is initially recognised at fair value plus transaction costs.
Subsequent gains or losses arising from changes in fair value are included as a separate component ofequity in the available for sale revaluation 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 theavailable for sale revaluation reserve is transferred to the income statement.

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ANZ Basel II Pillar 3 disclosure

September 2010

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

Balance sheet value

Equity investments
September 2010
$M
Value of listed (publicly traded) equities

Fair value

March 2010
$M

1,903

September 2009
$M

1,851

September 2010
$M

1,697

March 2010
$M

2,831

2,547

September 2009
$M
2,199

Value of unlisted (privately held) equities

1,514

1,531

3,337

1,566

1,558

3,713

Total

3,417

3,382

5,034

4,397

4,105

5,912

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

Gains (losses) on equity investments

Half Year
31 September 2010
$M

Half Year
31 March 2010
$M

Full Year
30 September 2010
$M

Full Year
30 September 2009
$M

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

23

2

25

(6)

Total unrealised gains (losses)

(80)

46

(34)

21

-

-

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

Table 13(f): Equities – Capital requirement
September 2010
$M

Risk Weighted Assets

March 2010
$M

September 2009$M

Equity investments subject to a 300% risk weight

1

1

2

Equity investments subject to a 400% risk weight

1,576

1,638

1,912

Total minimum capital requirement by equity asset class

1,577

1,639

1,914

Supervisory provisions

n/a

n/a

n/a

Grandfathering provisions

n/a

n/a

n/a

Aggregate amount of equity investments subject to:64

ANZ Basel II Pillar 3 disclosure

September 2010

Chapter 10 - Interest rate risk in the banking book (IRRBB)
Table 14

Interest rate risk in the banking book

Definition of IRRBBInterest 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 arises from the following principal
sources:•

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 to use the Internal Model Approach for the calculation of regulatory capitalfor IRRBB, under APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs).
Governance
The Risk Committee of the Board 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 raterisk arising from the repricing of asset and liabilities (mismatch risk) in the Banking Book. GALCO
have delegated the management of this mismatch risk to the Global Markets business. Market Risk is
the independent unit responsible for monitoring and measuring IRRBB and has designed andimplemented policies and procedures to ensure that IRRBB exposure is managed within the limit
framework set by the Risk Committee of the Board.
Management framework
As with other key risks within ANZ, IRRBB is managed under a comprehensive framework. Key
aspects of the measurement and reporting framework which provides the basis for monitoring IRRBB
include:•A comprehensive set of policies that promote the proactive identification and communication ofrisk•

Funds Transfer Pricing (FTP) framework to transfer interest rate risk from business units so it canbe 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 which actively monitors market risk exposure, compliancewith limits and risk policies, as well as the ongoing effectiveness and appropriateness of the risk
management framework•

Regular and effective reporting of IRRBB to Executive Management and the Board.

Measurement of IRRBBANZ 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
book due 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•

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.
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ANZ Basel II Pillar 3 disclosure

September 2010

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 IRRBBThe output of ANZ’s VaR and EaR calculations are analysed by Global Market Risk on a daily basis.
Stress tests are calculated monthly. Compliance with the risk appetite and limit framework isreported to CMRC, GALCO and the Risk Committee of the Board.
IRRBB regulatory capital is calculated monthly.
ANZ’s IRRBB 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.
The table below 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 2010

Table 14(b): Interest rate risk in the banking book (IRRBB) 58

Change in Economic Value
Standard Shock Scenario Stress Testing: Interest
rate shock applied

September 2010
$M

March 2010
$M

September 2009
$M

AUD
200 basis point parallel increase

128

32

(9)

200 basis point parallel decrease

(135)

(31)

16

200 basis point parallel increase

(1)

(20)

(76)

200 basis point parallel decrease

(0)

17

75

200 basis point parallel increase

(18)

(7)

(17)

200 basis point parallel decrease

11

7

10

200 basis point parallel increase

(8)

(4)

(5)

200 basis point parallel decrease

3

1

2

200 basis point parallel increase

(25)

8

(17)

200 basis point parallel decrease

16

3

11

NZD

USD

GBP

Other

IRRBB regulatory capital

615

651

197

IRRBB regulatory RWA

7,690

8,136

2,465

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, the single worst
scenario is 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.

58

Risk Weighted Assets are derived by multiplying total regulatory capital by 12.5

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ANZ Basel II Pillar 3 disclosure

September 2010

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 ANZ Board’s Risk Committee
and the 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 metrics
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. ANZ’s funding profile strengthened further during
2010 as a result of solid growth in customer deposits and the continued focus on avoiding short-term
wholesale funding maturity concentrations.
Customer deposits and other funding liabilities increased by 10% to $267.1 billion at 30 September
2010 (58% of total funding) from $242.4 billion (55% of total funding) at 30 September 2009.
The proportion of total funding from term wholesale source has been maintained.
As a result, the Group’s proportional reliance on short-term wholesale funding decreased from 17% to
12% in the year to 30 September 2010. Proportionate short-term wholesale funding has
approximately halved over the last two years (22% as at 30 September 2008).
Wholesale funding
ANZ maintained access to all major wholesale funding markets. Benchmark term debt issues were
executed in AUD, USD, EUR, JPY, CAD, CHF and NZD. Short-term wholesale funding markets continue
to function effectively, both locally and offshore. $26.4 billion of term wholesale funding (with aremaining term greater than one year at the end of the financial year) was issued during 2010 largely
to replace maturing term debt and also to commence pre-funding the 2011 term funding issuancerequirement:

The weighted average tenor of new term debt issuance lengthened to 4.7 years (from 3.9
years in 2009)

The weighted average cost of new term debt issuance decreased approximately 42 basis
points during 2010 as a result of more stable market conditions relative to the prior year.
Average portfolio costs remain substantially above pre-crisis levels and continue to increaseas maturing term wholesale funding is replaced at higher spreads

In Feb 2010 the Australian Government announced that the Guarantee Scheme for Large
Deposits and Wholesale Funding would close to new liabilities on 31 March 2010. The
withdrawal of the Australian Government Guarantee did not have any adverse impact on
ANZ’s funding activities. The withdrawal of the Australian Government Guarantee did not
68ANZ Basel II Pillar 3 disclosure

September 2010

adversely impact ANZ’s funding activities. ANZ has not used the Australian Government
Guarantee for a benchmark debt issue since June 2009

Guaranteed wholesale funding comprises only 4.6% of ANZ’s total funding.

Liquidity portfolio
The ANZ holds a diversified portfolio of cash and high-quality, highly-liquid securities that may be soldor pledged to provide same-day liquidity. This portfolio helps protect the ANZ’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 (repo eligible).
At 30 September 2010 the volume of eligible securities available, post any repurchase (i.e. “repo”)
discounts applied by the applicable central bank, was $66.7 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, ANZ holds additional cash and liquid asset balances.
The Markets business also holds secondary sources of liquidity in the form of highly liquid instruments
in its trading portfolios.

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ANZ Basel II Pillar 3 disclosure

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Appendix - 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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