The Australian Prudential Regulation Authority (APRA) announced on Thursday (11 July) that ANZ, National Australia Bank (NAB), and Westpac will have to raise their minimum capital reserves by $500 million each.
This requirement is effective until the three major banks have completed their planned remediation to improve risk management and addressed issues that were identified in their self-assessments.
The prudential regulator had decided in May 2019 to apply a $1 billion capital add-on to the Commonwealth Bank of Australia (CBA) in response to the findings of its prudential inquiry into CBA.
Following the release of the final report of the CBA inquiry, APRA requested 36 banks, insurers and superannuation licensees in June last year to reflect on the findings to see if there are any relatable weaknesses.
Based on the self-assessment reports received in December last year, the prudential regulator had concluded that while there were no concerns raised about financial soundness, there are material weaknesses in the management of non-financial risks across the industry, not just at CBA.
The main findings of APRA’s review of self-assessments were:
- non-financial risk management requires improvement
- accountabilities are not always clear, cascaded and effectively enforced
- acknowledged weaknesses are well-known and some have been longstanding
- risk culture is not well understood and therefore may not be reinforcing the desired behaviours
APRA’s review of the self-assessments led it to consider additional capital requirements, as well as seek assurances from all boards that weaknesses in non-financial risk management would be addressed as a matter of priority.
“Australia’s major banks are well capitalised and financially sound, but improvements in the management of non-financial risks are needed. This will require a real focus on the root causes of the issues that have been identified, including complexity, unclear accountabilities, weak incentives and cultures that have been too accepting of longstanding gaps,” APRA chair Wayne Byres said.
“The major banks play a vital role in the stability of the entire financial system, and APRA expects them to hold themselves to the highest standards of risk governance. Their self-assessments reveal that they have fallen short in a number of areas, and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated.”
The prudential regulator said that its supervisors are providing “tailored feedback” to financial institutions that provided self-assessment reports, increasing scrutiny of identified weaknesses as remediation actions are implemented, and considering further raising operational risk capital requirements.
Responding to the announcement, NAB and Westpac both said the additional $500 million of operational risk capital equates to an impact of 16 basis points on common equity tier 1 capital ratio, based on its capital position at the end of the March 2019 quarter, while for ANZ, it equates to an impact of 18 basis points.
NAB chief executive Philip Chronican said the bank’s self-assessment on culture, accountability and governance “sets out a clear program of reform” to strengthen non-financial risk management, that “material progress” has been made, and that it will report on the 26 actions identified in November this year.
“The board customer committee is now in place – and has approved a new customer outcomes framework to define the principles and standards in the design, pricing and structure of all NAB products,” NAB’s disclosure to the ASX stated.
The major bank also claimed that $170 million has been repaid to customers from June 2018 to June 2019 and that there has been a 50 per cent reduction in aged small-business complaints from October 2018.
Westpac said that it has made 20 per cent progress on the actions it identified in its culture, governance and accountability self-assessment, while ANZ did not provide a progress update on its “self-assessment roadmap”.
The increased operational risk capital requirement is effective from 30 September 2019.
APRA has earlier this week announced that the major banks will need to increase their capital reserves by 3 percentage points of risk-weighted assets by 1 January 2024, which is smaller than the expected 4 to 5 percentage point increase and has a longer timeline.
The prudential regulator said it expects the new requirements to strengthen the loss-absorbing capacity of the major banks by a total $50 billion while resulting in a minor rise in funding costs of less than 5 basis points.