Australia and New Zealand Banking : APS 330 Pillar III Disclosure at 30 September 2019

2019 BASEL III PILLAR 3 DISCLOSURE

AS AT SEPTEMBER 2019

APS 330:

PUBLIC DISCLOSURE

ANZ Basel III Pillar 3 Disclosure

September 2019

Important notice

This document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) to meet its disclosure obligations under the Australian P r u d e n t i a l Regulation Authority (APRA) ADI Prudential Standard (APS) 330: Public Disclosure.

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ANZ Basel III Pillar 3 Disclosure	September 2019
Table of Contents1
Chapter 1 - Introduction ...............................................................................................................................	3
Purpose of this document..................................................................................................................	3
Chapter 2 - Risk appetite and governance ......................................................................................................	4
Risk types	......................................................................................................................................	4
Risk appetite framework ...................................................................................................................	5
Risk management governance ...........................................................................................................	5
Chapter 3 - Capital reporting and measurement ..............................................................................................	7
Chapter 4 - Capital and capital adequacy ........................................................................................................	8
Table 1	Capital disclosure template ................................................................................................	9
Table 2	Main features of capital instruments ..................................................................................	19
Table 6	Capital adequacy.............................................................................................................	19
Chapter 5 - Credit risk .................................................................................................................................	23
Table 7	Credit risk - General disclosures........................................................................................	23
Table 8	Credit risk - Disclosures for portfolios subject to the Standardised approach and
	supervisory risk weights in the IRB approach ......................................................................	40
Table 9	Credit risk - Disclosures for portfolios subject to Advanced IRB approaches............................	41
Table 10	Credit risk mitigation disclosures .......................................................................................	51
Table 11	General disclosures for derivative and counterparty credit risk .............................................	56
Chapter 6 - Securitisation ...........................................................................................................................	60
Table 12	Banking Book - Securitisation disclosures ...........................................................................	63
	Trading Book - Securitisation disclosures............................................................................	71
Chapter 7 - Market risk................................................................................................................................	72
Table 13	Market risk - Standard approach.......................................................................................	72
Table 14	Market risk - Internal models approach..............................................................................	73
Chapter 8 - Operational risk..........................................................................................................................	77
Table 15	Operational risk ..............................................................................................................	77
Chapter 9 - Equities ...................................................................................................................................	81
Table 16	Equities - Disclosures for banking book positions ................................................................	81
Chapter 10 - Interest Rate Risk in the Banking Book .......................................................................................	83
Table 17	Interest Rate Risk in the Banking Book ..............................................................................	83
Chapter 11 - Leverage and Liquidity Coverage Ratio........................................................................................	86
Table 18	Leverage Ratio................................................................................................................	86
Table 19	Summary comparison of accounting assets vs. leverage ratio exposure measure.....................	87
Table 20	Liquidity Coverage Ratio disclosure template ......................................................................	88
Table 21	NSFR disclosure template .................................................................................................	89
Glossary.....................................................................................................................................................		91

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

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ANZ Basel III Pillar 3 Disclosure

September 2019

Chapter 1 - Introduction

Purpose of this document

This document has been prepared in accordance with the Australian Prudential Regulation Authority (APRA) ADI Prudential Standard (APS) 330: Public Disclosure.

APS 330 mandates the release to the investment community and general public of information relating to capital adequacy and risk management practices. APS 330 was established to implement Pillar 3 of the Basel Committee on Banking Supervision's framework for bank capital adequacy2. In simple terms, the Basel framework consists of three mutually reinforcing 'Pillars':

Pillar 1	Pillar 2			Pillar 3
Minimum capital requirement	Supervisory review process			Market discipline
Minimum capital requirements for	Firm-wide risk oversight, Internal	Regular disclosure to the market of
Credit Risk, Operational Risk, Market	Capital Adequacy Assessment Process	qualitative	and quantitative	aspects
Risk and Interest Rate Risk in the	(ICAAP), consideration of additional	of	risk	management,	capital
Banking Book	risks, capital buffers and targets and	adequacy and underlying risk metrics
	risk concentrations, etc.

APS 330 requires the publication of various levels of information on a quarterly, semi-annual and annual basis. This document is the annual disclosure.

Basel in ANZ

In December 2007, ANZ received accreditation for the most advanced approaches permitted under Basel for credit risk and operational risk, complementing its accreditation for market risk. Effective January 2013, ANZ adopted APRA requirements for Basel III with respect to the measurement and monitoring of regulatory capital.

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 Financial Report and in Pillar 1 returns provided to APRA. In addition, ANZ's external auditor has performed an agreed upon procedure review with respect to these disclosures.

Comparison to ANZ's Financial Reporting

These disclosures have been produced in accordance with regulatory capital adequacy concepts and rules, rather than with accounting policies adopted in ANZ's financial reports. As such, there are different areas of focus and measures in some common areas of disclosures. These differences are most pronounced in the credit risk disclosures, for instance:

• The principal method for measuring the amount at risk is Exposure at Default (EAD), which is the estimated amount of exposure likely to be owed on a credit obligation at the time of default. Under the Advanced Internal Ratings Based (AIRB) approach in APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, banks are accredited to provide their own estimates of EAD for all exposures (drawn, commitments or contingents) reflecting the current balance as well as the likelihood of additional drawings prior to default.
• Loss Given Default (LGD) is an estimate of the amount of losses expected in the event of default. LGD is essentially calculated as the amount at risk (EAD) less expected net recoveries from realisation 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 different areas of ANZ's internal divisional and business unit organisational structure.

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

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

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ANZ Basel III Pillar 3 Disclosure

September 2019

Chapter 2 - Risk appetite and governance

Risk types: ANZ is exposed to a broad range of inter-related business risks.

• Capital Adequacy risk is the risk of loss arising from the Group failing to maintain the level of capital required by prudential regulators and other key stakeholders (shareholders, debt investors, depositors, rating agencies, etc.) to support ANZ's consolidated operations and risk appetite.
• Compliance risk is the risk of failure to act in accordance with laws, regulations, industry standards and codes, internal policies and procedures and principles of good governance as applicable to ANZ's businesses.
• Credit risk is the risk of financial loss resulting from a counterparty failing to fulfil its obligations or a decrease in credit quality of a counterparty resulting in a financial loss. Credit Risk incorporates the risks associated with us lending to customers who could be impacted by climate change or by changes to laws, regulations, or other policies adopted by governments or regulatory authorities, including carbon pricing and climate change adaptation or mitigation policies.
• Equity risk is the risk of financial loss arising from the unexpected reduction in value of equity investments not held in the trading book including those of the Group's associates.
• Insurance risk is risk of unexpected losses resulting from worse than expected claims experience, including any of the following that expose an insurer to financial loss: inadequate or inappropriate underwriting, claims management, reserving, insurance concentrations, reinsurance management, product design and pricing.
• Market risk stems from ANZ's trading and balance sheet activities and is the risk to the Group's earnings arising from changes in any interest rates, foreign exchange rates, credit spreads, volatility, and correlations or from fluctuations in bond, commodity or equity prices.
• Liquidity and Funding risk is the risk that the Group is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt or the Group having insufficient capacity to fund increases in assets.
• Operational risk is risk of loss and/or non-compliance with laws resulting from inadequate or failed internal processes, people and/or systems, or from external events. This definition includes legal risk, and the risk of reputation loss, or damage arising from inadequate or failed internal processes, people and systems, but excludes strategic risk.
• Reputation risk3 is defined as the risk of loss that directly or indirectly impacts earnings, capital adequacy or value, that is caused by adverse perceptions of the Group held by any of customers, the community, shareholders, investors, regulators, or rating agencies, conduct risk associated with the Group's employees or contractors (or both) or the social or environmental (or both) impacts of our lending decisions.
• Securitisation risk is 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.
• Strategic risk is the risk that the Group's business strategy and strategic objectives may lead to an increase in other key Material Risks - for example: Credit Risk, Market Risk and Operational Risk.
• Technology risk is the risk of loss and/or non-compliance with laws resulting from inadequate or failed internal processes, people and systems or from external events impacting on IT assets, including the compromise of an IT asset's confidentiality, integrity or availability.

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

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