Westpac has edged closer to being back in the regulatory good books after an announcement on Thursday by APRA, the banking sector’s key watchdog.
APRA (the Australian Prudential Regulation Authority) said it had removed a liquidity add-on imposed on Westpac for breaching APRA’s prudential standards on liquidity.
These related to Westpac’s NZ banking arm, which the Reserve Bank of NZ had found to have deficient risk management in place.
APRA took imposed the add on in 2020 in response to material breaches that demonstrated weaknesses in the bank’s risk management and oversight, risk control framework and risk culture in its liquidity risk management and reporting.
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 the Net Stable Funding Ratio (NSFR) – two key regulator measures of how much money Westpac had on hand in the event of a sudden crisis.
“While the breaches have been rectified, and do not raise concerns about the overall soundness of Westpac’s current liquidity position, APRA believes they demonstrate weaknesses in risk management and oversight, risk control frameworks and risk culture,” APRA said at the time.
A 10% add-on was applied to the net cash outflow component of Westpac’s Liquidity Coverage Ratio (LCR) calculation.
Westpac has since completed a program to remediate findings from an independent review into Westpac’s liquidity risk management to APRA’s satisfaction. The removal of the liquidity add-on is effective from 1 September 2022.
But Westpac has not escaped all the APRA penalties – the regulator said its capital requirement add-on of $1 billion to reflect Westpac’s heightened operational risk profile remains in place.
In December 2019, APRA started a risk governance review into Westpac and applied the $1 billion capital add-on to the bank’s operational risk capital requirement in response to allegations by AUSTRAC that Westpac had breached anti-money laundering laws.
APRA said in its December 2019 statement that “the capital add-on will remain in place until APRA is satisfied that deficiencies in risk governance have been adequately remediated.”
Clearly APRA remains unsatisfied that Westpac has managed to lower the heightened risk profile the regulator found.
In other words, Westpac is sort of OK, but still riskier than the other three majors.
Investors sent the shares down 1.7% yesterday to $21.23.
