APRA slaps Westpac with enforceable undertaking

The Australian Prudential Regulation Authority (APRA) has taken enforcement action against Westpac in response to what it said were “material breaches” of APRA’s prudential standards on liquidity.

The breaches, which were identified during 2019 and 2020, relate to the incorrect treatment of specific funding and loan products for the purposes of calculating the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).

In December 2019, APRA began a risk governance review into Westpac and applied a $1 billion capital add-on to Westpac’s operational risk capital requirement.

This was done in response to allegations by the Australian Transaction Reports and Analysis Centre (AUSTRAC) that Westpac had breached anti-money laundering laws 23 million times, with some breaches reportedly relating to child exploitation such as trafficking and child pornography.

When APRA announced that it had launched an investigation into Westpac, it said that it would investigate whether Westpac had breached the Banking Act 1959.

APRA had said that it would focus on the conduct that led to the breaches of the anti-money laundering laws alleged by AUSTRAC, as well as the bank’s actions to rectify and remediate the issue after they were identified.

APRA had also said the investigation would examine whether Westpac, its directors and/or its senior managers breached the Banking Act, including the Banking Executive Accountability Regime (BEAR), or contravened APRA’s prudential standards.

APRA has now said that while the breaches have been rectified and do not raise concerns about the overall soundness of Westpac’s current liquidity position, the prudential regulator believes that they demonstrate weaknesses in risk management and oversight, risk control frameworks and risk culture.

As a result, APRA said it will now require “comprehensive” reviews by independent third parties of Westpac’s compliance with APRA’s liquidity reporting requirements and the remediation of its control framework for liquidity risk management as well as the effectiveness of the implementation of the recommendations of the bank’s compliance plan review.

Commenting on APRA’s action against the major bank, APRA deputy chair John Lonsdale said: “Under APRA’s liquidity requirements, banks must maintain a sound liquidity risk management framework, ensuring accurate calculation of the LCR and NSFR. While Westpac’s LCR and NSFR are comfortably above regulatory minimums, APRA’s actions reflect how seriously we view breaches of our prudential requirements.

“In taking these actions, our objective is to obtain assurance that Westpac is complying with APRA’s liquidity requirements. It also sends a message to the wider banking industry that breaches of prudential standards are not acceptable, and APRA will respond as appropriate, including by imposing penalties.”

Westpac responds to APRA’s actions

Westpac responded to APRA’s action with a statement to the ASX, saying that APRA has notified the major bank of its progress, findings and proposed next steps.

“In particular, APRA identified that Westpac has an immature and reactive risk culture, unclear accountabilities, capability shortfalls and inadequate oversight,” the bank said.

Commenting on APRA’s actions against the bank, Westpac CEO Peter King said: “We acknowledge the findings of APRA’s review and accept the need to work faster to address our shortcomings.”

According to Westpac, APRA’s outcomes are broadly consistent with the findings of Westpac’s Culture Governance and Accountability reassessment report that was released in July.

The major bank said it has commenced a range of risk programs to address the issues, which are summarised in the group’s full-year 2020 reporting.

APRA has indicated that Westpac has not demonstrated the expected improvements from these programs, stating that a more holistic and integrated program that will address the full scope of financial and non-financial risk issues and their root causes is required.

APRA also said that a stronger assurance over delivery is required.

The bank stated that as part of the next steps, Westpac expects to enter into an enforceable undertaking over risk governance remediation.

It added that it would work “constructively” with APRA on the detail of the enforceable undertaking and expects to provide an update to the market when it is finalised.

APRA also announced that it is taking action for breaches of Westpac’s liquidity requirements, which mostly related to Westpac New Zealand Ltd (WNZL).

Westpac said that while the breaches have been rectified, and Westpac Group would have still continuously met its liquidity ratio minimums, Westpac Group had breached the prudential standards.

“Specifically, as a material offshore subsidiary, WNZL’s liquidity coverage ratio (LCR) would have been below 100 per cent for much of 2019,” Westpac said in its statement.

Westpac’s LCR for the September quarter 2020 was 151 per cent.

APRA said it will require Westpac to apply a 10 per cent add-on to the net cash outflow component of its LCR calculation until the findings from these independent reviews are addressed to APRA’s satisfaction.

According to Westpac, if this overlay, (which will apply from 1 January 2021) were applied today, it would reduce the group’s LCR by around 10 to 15 percentage points.

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