Developing a prudential framework for conglomerates is not easy but it will be worth it to avoid an “AIG problem”, where the activities of other financial arms nearly brought down the insurer, according to Australian Prudential Regulation Authority (APRA) Chairman John Laker.

The regulator is still working on the framework for level-three groups, or conglomerates whose activities cross financial segments, such as banking and insurance.

It consists of four components: requirements for group governance, risk exposures, risk management and capital adequacy.

APRA has already released draft prudential standards for the first two categories, with drafts for the others to be released in the next couple of months.

“This has proven a complex exercise with little global precedent to draw on, but the benefits to Australia of avoiding a so-called AIG problem are very real,” Dr Laker told the Australian Centre for Financial Studies/Finsia leadership series last Friday.

APRA is also reviewing its prudential standard on securitisation and plans to release a discussion paper on proposed reforms mid-year, he says.

“We want to ensure the unduly complex and obscure securitisation structures that proved so toxic in securitisation markets abroad do not emerge in Australia, and that Australian securitisations are seen as among the simplest and safest structures in the world.”