High flying Macquarie Group has been hit hard by APRA, the key financial regulator which has imposed a massive half a billion extra capital charge and other penalties for two years of breaches of liquidity and reporting regulations in its key Macquarie Bank business.
In what it described as “multiple material breaches of APRA’s prudential and reporting standards” APRA on Thursday accused Macquarie Bank of not being able to manage the “operational risk” involved in its own internal businesses from 2018 to 2020.
The strength of APRA’s comments make it clear that this is no April Fool’s Day joke. It is an indictment of the managerial and banking defiencies of senior executives at Macquarie Bank and at Macquarie Group.
It is criticism rarely directed in public at a major financial group – Westpac and the Commonwealth Bank were criticised by APRA (and others) over money laundering transactions but APRA’s criticisms are far more damaging because they accuse Macquarie of being in effect, unable to work out how much capital it needed to stay in business each day for a two-year period.
APRA is in effect telling the world that for two years from 2018 to 2020, Macquarie had no clue as to the real state of its operational risks in the bank and the amount of capital needed to support those.
In Thursday’s statement, APRA Deputy Chair John Lonsdale said: “For one of the country’s largest financial institutions to have committed breaches of this nature is disappointing and unacceptable.”
“Alongside the enforcement actions, APRA will subject Macquarie Bank to intensified supervision to address the bank’s persistent difficulties in complying with its prudential obligations.
“We cannot rule out further action as more information comes to light about the root causes of these breaches,” Mr Lonsdale warned.
APRA said it had, from April 1 “increased Macquarie Bank’s liquidity and operational risk capital requirements because of the incorrect treatment of specific intra-group funding arrangements for the purposes of calculating capital and related entity exposure metrics, as well as multiple breaches of APRA’s reporting standards on liquidity between 2018 and 2020.”
“These resulted from deficiencies in Macquarie Bank’s ability to manage the operational risk inherent in the complex intra-group structure, within which it transacts with its related entities.
APRA said the breaches “are historical and do not impact on the current overall soundness of Macquarie Group’s capital or liquidity positions.”
“However, they raise serious questions about the bank’s risk management practices and ability to calculate and report key prudential ratios”
In other words, APRA is saying that Macquarie Bank’s executives were not only unable to work out just what its daily risks were and the amount of capital needed to support that risk, but had “persistent difficulties” in getting it right to APRA’s satisfaction.
As a result APRA says it will require Macquarie Bank “to hold an operational capital overlay of $500 million, reflecting deficiencies in its management of operational risk inherent in the bank’s intra-group structure;
- a 15 per cent add-on to the net cash outflow component of its LCR calculation; and
- a 1 per cent adjustment to the available stable funding component of its NSFR calculation.
- In addition, APRA will require Macquarie Bank to resubmit and restate selected regulatory returns.
These steps will curtail Macquarie’s ability to do big deals and make more money because the amount of capital it can risk will be reduced and it will be required to keep more cash aside.
It could impact shareholder dividends as well.
Although not mentioned by name, APRA’s statement covers the two most recent CEOs at Macquarie Group – the present CEO, Shemara Wikramanayake who took the role in late 2018. Her predecessor was Nicholas Moore who was CEO of Macquarie Group for a decade until November 2018.
The problems at the Commonwealth and Westpac saw significant boardroom and managerial changes at both banks. Will the same happen at Macquarie after APRA’s statement yesterday?
APRA is in effect saying these problems were allowed to continue while both were in charge of the listed company, Macquarie Group which controls the bank.
