Reserve Bank censures ANZ for 'persistent weakness in process'

Friday, 17 May 2019

ANZ has been censured by the Reserve Bank.

The Reserve Bank has censured ANZ New Zealand, stripping it of its right to calculate how much risk capital it requires to hold due to 'a persistent failure in its controls and attestation process'.

In a stern statement from the central bank, ANZ's board, headed by former prime minister Sir John Key, comes under fire for incorrectly attesting to compliance over five years.

The Reserve Bank requires banks to maintain a minimum amount of operational risk capital, which is determined relative to the risk of each bank's business.

Capital allows a bank to absorb the impact of losses without becoming insolvent.

* ANZ breaches conditions of registration; no punishment from Reserve Bank

* Reserve Bank slams Westpac over 'serious non-compliance' with risk rules**

Sir John Key, former prime minister of New Zealand, is chairman of the bank.

'The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses,' the central bank said in a statement.

The action taken against ANZ means the bank is now required to use a standardised approach to measure how much risk capital is required.

This increases the minimum capital ANZ must hold for operational risk by around 60 per cent, to $760 million, the Reserve Bank said.

According to the Reserve Bank, it 'had encouraged' ANZ to review its attestation process - through which bank directors assess whether the bank is complying with the conditions of its regulations. When ANZ conducted the review, it discovered the issue and alerted the Reserve Bank.

'Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank's directors and management,' deputy governor Geoff Bascand said.

Deputy Governor of the Reserve bank Geoff Bascand.

'The Reserve Bank's role is to review and approve internal models. The onus is then on bank directors to ensure, and attest, that their bank is compliant with the Reserve Bank's regulatory requirements. To do that, bank directors need to be satisfied that the internal assurance processes that sit behind the attestations are being adhered to.

'ANZ's directors have attested to compliance despite the approved model not being used since 2014. The fact that this issue was not identified for so long highlights a persistent weakness with ANZ's assurance process,' Bascand said.

The Reserve Bank said it was continuing to work with ANZ 'in assessing its systems controls before determining any further action'.

In a statement, ANZ said that back in 2014 is had calculated its operational risk capital to be based a previous calculation model which was decommissioned without Reserve Bank approval.

ANZ's quarterly disclosure statement added detail, saying ANZ New Zealand's ultimate parent company was responsible for calculating the required operational risk capital.

'A failure of systems and controls, as well as no verification being undertaken by the bank, meant that the ultimate parent bank decommissioned the [Reserve Bank] approved model without the bank ensuring that it had the necessary regulatory approvals in place to move to a new model,' ANZ said.

'The bank accepts that this was not in compliance with condition of registration 1B.'

In a media release, ANZ said: 'While isolated, and with no impact on customers or the operation of the bank, ANZ New Zealand is disappointed this error occurred,' ANZ said in a statement. A spokesman later acknowledged that the board was disappointed.

The decision required it to hold an additional $277m in operational risk capital.

In simple terms, the four large Australian-owned banks have far more flexibility to use internal models to calculate how much risk capital they must hold on the balance sheet than the New Zealand owned banks, although the Reserve Bank is reviewing whether this should be allowed.

The timing of the statement about ANZ is intriguing, as it comes the day submissions close on the Reserve Bank's proposals.

'As part of its current capital review, the Reserve Bank is reviewing its capital framework for banks,' the Reserve Bank said in its statement on ANZ.

'Due in part to proven weaknesses with the internal models approach and in line with moves by other supervisor banks around the world, the review proposes that all banks adopt a new standardised approach for calculating operational risk capital.'