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

Wednesday, 15 November 2017

Westpac has been forced to hold more cash on its balance sheet after the Reserve Bank found 'serious shortcomings and non-compliance' in its risk models.

The Reserve Bank has announced it will require Westpac New Zealand to hold an additional 2 percentage points of each form of regulatory capital banks are required to hold until the problems are fixed.

Under its operating agreement with the Reserve Bank, Westpac is required to operate approved risk models to calculate how much regulatory capital it needs to hold.

On Wednesday the Reserve Bank revealed the outcome of an independent report into Westpac's operations in New Zealand, which found that 17 out of 35 capital models were unapproved. At one time 21 of the 32 capital models it used were unapproved.

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Operating unapproved models could make it impossible for regulators to determine exactly how risky the bank's loan book is, or how much capital it should hold to protect customers.

Westpac had noted the breach in its regulatory disclosure at the end of 2016. The problems date back to 2008.

In a statement the Reserve Bank said Westpac had 'materially failed to meet requirements around model governance, processes and documentation'.

It has been given 18 months to rectify the problems.

'This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,' Reserve Bank deputy governor Geoff Bascand said.

The penalty imposed on Westpac may have little practical impact. In a statement Westpac said its current regulatory capital ratios 'are sufficient to accommodate these increases'.

In a statement Westpac said it was 'disappointed' not to have met the Reserve Bank's requirements.

'[Westpac] acknowledges the high standards required of an [internal ratings-based] accredited bank and has already taken several steps to address the issues raised in the review.'

The Reserve Bank said Westpac had not deliberately sought to reduce its regulatory capital.

'While there have been serious shortcomings and non-compliance, it appears that Westpac has remained well above its required regulatory capital levels.'