Reserve Bank takes action after BNZ 'errors'

Tuesday, 19 November 2019

The Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.

The Reserve Bank has increased its monitoring of BNZ, after a number of errors made by the bank were identified.

It has applied 'precautionary adjustments' to its capital requirements after weaknesses were identified in BNZ's capital calculation processes.

Banks are required to hold a set amount of capital against the loans they issue, which is determined relative to the risk of each bank's business.

BNZ has not been in breach of minimum capital requirements at any point.

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The Reserve Bank said BNZ identified a number of errors while undertaking a programme of remediation, which began in early 2018 and is expected to continue into 2020.

These included three capital calculation errors, which resulted in misreported risk-weighted assets over a number of years.

BNZ was late launching its KiwiSaver, and has been playing catch-up with the other big banks.

It is now required to increase the risk weight floor of its operational risk capital model from $350 million to $600m capital. The $250m increase is a supervisory capital overlay.

'Given the likelihood that further compliance issues will be discovered during the review and remediation, the Reserve Bank regards a precautionary capital adjustment as prudent,' Reserve Bank deputy governor Geoff Bascand said.

In 2017, the Reserve Bank conducted a review of bank director attestation processes and noted that many banks were attesting to compliance on the basis of negative assurance. They did not have enough evidence to show they were not in compliance.

Sam Perkins, BNZ's chief risk officer, said: 'We hold ourselves to the highest standards at BNZ and are disappointed to have not met RBNZ's requirements. The temporary and precautionary nature of the increased minimum capital requirements from RBNZ acknowledges the significant amount of work underway at BNZ to strengthen our processes, and that we have self-reported issues when we have found them. We are making good progress on addressing this issue and expect to have it completed next year.'

ANZ was censured in May for 'persistent failure in its controls and attestation process'.

Claire Matthews, a banking commentator from Massey University, said this was a more significant increase - 70 per cent compared to ANZ's 60 per cent.

'It's a big deal because it's a regulator-imposed requirement but BNZ's total shareholder equity as at March 31, 2019 was $7.622 billion with a total capital ratio of 13.7 per cent, so it's not evident it will have much impact in practical terms.'

Over the past year, a number of banks had disclosed breaches of their conditions of registration, Bascand said.

Many of these have related to errors in the calculation of their regulatory capital or liquidity which, in some cases, had gone undetected for a number of years.

'We are reassured by BNZ's response to the issues along with the independent oversight from PWC,' Bascand said 'BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses.

'The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank's expectation that the current review will identify all outstanding compliance issues and potential breaches.'