APRA hits Westpac with new action over prudential breaches

Banking regulators have hit Westpac with yet more enforcement action for ‘material breaches’ of prudential standards.

Westpac has been slapped with new APRA enforement action over its liquidity ratio.

The banking regulator has hit Westpac with enforcement action for lax compliance and “material breaches” of a standard on liquidity, forcing the bank to undertake independent reviews and fix issues.

The action is yet another blow to Westpac after it agreed to pay a record $1.3bn penalty to financial crimes regulator Austrac for millions of breaches of anti-money laundering laws.

On Tuesday, the Australian Prudential Regulation Authority announced the latest enforcement action against Westpac, in relation to breaches identified during 2019 and 2020.

It slapped Westpac with a more onerous calculation of its liquidity ratio, and further action could be taken by APRA and its counterpart in New Zealand over the failings.

APRA said the breaches related to the incorrect treatment of specific funding and loan product for calculating the Westpac’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Banks need to hold highly-liquid assets to be able to fund short-term cash outflows, and these levels are stipulated by regulators.

“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,” the statement said.

APRA is requiring a tougher calculation of the LCR and “comprehensive reviews” by independent third parties of Westpac’s compliance with liquidity reporting requirements and the fixing of its control framework for liquidity risk management.

“Until the findings from the independent reviews are addressed to APRA’s satisfaction, APRA will also require Westpac to apply a 10 per cent add-on to the net cash outflow component of its LCR calculation,” the regulator said.

APRA deputy chair John Lonsdale said under the liquidity requirements, banks had to maintain “a sound liquidity risk management framework” to ensure accurate calculation of the LCR and NSFR.

“While Westpac’s LCR and NSFR are comfortably above regulatory minimums, APRA’s actions reflect how seriously we view breaches of our prudential requirements,” he added.

“In taking these actions, our objective is to obtain assurance that Westpac is complying with APRA’s liquidity requirements. It also sends a message to the wider banking industry that breaches of prudential standards are not acceptable, and APRA will respond as appropriate, including by imposing penalties.

In a separate statement to the ASX on Tuesday, Westpac said it expected to enter into an enforceable undertaking over risk remediation, given APRA had found an “immature and reactive risk culture, unclear accountabilities” and other issues at the bank.

“We acknowledge the findings of APRA’s review and accept the need to work faster to address our shortcomings,” Westpac chief executive Peter King said.

Velocity Trade analyst Brett Le Mesurier said the APRA statement contained some of the “strongest language” he’d seen used by a regulator to a major Australian financial institution. He also raised the prospect that regulatory issues would weigh on Westpac’s cost base.

“They are likely to have the highest underlying cost growth of any major bank in the current financial year, and it is substantially due to dealing with these issues,” he said.

“Over the past decade Westpac has gone from one of the most efficient major banks to one of the least efficient.”

Westpac’s shares edged up 0.7 per cent to $20.28 on Tuesday, but trailed a 1.1 per cent rise in the S&P/ASX200.

Westpac noted the regulator’s findings were consistent with its own culture, governance and accountability report released in July, and that it had started several risk programs to address issues.

“Westpac will work constructively with APRA on the detail of the enforceable undertaking and we expect to update the market when it is finalised,” the bank said.

On the liquidity requirement breaches, Westpac said the matter predominantly related to its NZ unit and while the breaches had been rectified the overall bank would still have to meet its liquidity ratio minimums.

Westpac admitted to breaching the prudential standards with the NZ business’ LCR being below 100 per cent for much of 2019.

It said the LCR for the September quarter 2020 was 151 per cent.

Westpac outlined APRA’s requirements of an accountability review, external review of liquidity compliance and implementing recommendations of its compliance review.

On the 10 per cent overlay APRA is forcing on the bank’s net cash outflows, Westpac said it would be in place until the shortcomings were rectified.

“This overlay will apply from 1 January 2021 and if applied today would reduce the group’s LCR by around 10 -15 percentage points,” the bank’s statement said.

Westpac’s penalty follows Bendigo and Adelaide Bank being stung for similar transgressions in October.

A year ago, in response to Austrac’s damning legal action against Westpac APRA kicked off risk governance review into Westpac and hit the bank with an additional capital charge it had to hold. The regulator imposed a $500m capital add-on in December last year, in addition to a $500m charge that was already in place for governance and risk shortcomings.

APRA’s Tuesday statement said that review was ongoing, and the capital add-on would remain in place until “deficiencies in risk governance have been adequately remediated”.