CBA could learn from NAB’s year from hell

There’s a vast gulf in how the banks have dealt with scandals.

Former National Australia Bank chief executive John Stewart in 2004.

So far as corporate shocks go, it had it all — allegations of an eye-watering scandal in a big bank, a risk-management crisis, the CEO resigning, directors leaving, ­internal inquiries, investigations by federal police and regulators and a media firestorm.

And no, it was not the Commonwealth Bank. This was NAB in early 2004, in the grip of a forex trading scandal, which peeled back the culture inside one of the country’s most prestigious organisations. It was a scandal that left NAB reeling as it sought to repair damage to its reputation and an implosion in both management ranks and the board.

It was unlike CBA’s horrible last year which followed explosive allegations by Austrac of more than 50,000 breaches of money-laundering and terror ­finance reporting laws. The Austrac ­allegations drew excoriating ­criticism of the bank from the federal Treasurer through to the governor of the Reserve Bank of Australia, and an investigation by an independent panel appointed by the prudential regulator. CBA has circled the wagons to fight.

NAB’s own year of hell started 13 years earlier in the first weeks of January 2004 when it ­discovered four of its traders had taken massive losses in currency bets, and then used a small reporting window in the bank’s systems to create fake transactions to cover up the losses. The scam proceeded and the losses grew, eventually reaching $360 million. When the bank found out, the shots could be heard across the country.

On January 13, 2004, NAB ­announced to an astonished stockmarket that it had suspended four traders over unauthorised foreign exchange trading. The Australian Federal Police were involved. Two days later, the Australian Prudential Regulation Authority, led by John Laker, announced it would review the bank.

Within two months, APRA would deliver a scathing report ­imposing a raft of remedial ­actions. The regulator also closed down NAB’s currency options desk, lifted the bank’s capital ­adequacy ratio from 8 to 10 per cent, and withdrew approval for NAB to use its own internal model to determine capital set aside for market risk.

These measures would stay in place until the bank acted on APRA’s remedies. It might have been just four rogue traders, but the impact was felt across the ­organisation.

On Friday, January 30, two weeks after the scandal had blasted on to the stage, chief executive Frank Cicutto resigned. A week earlier, he had insisted he would not quit. On the Monday morning, the new chief executive, John Stewart, flew into Tullamarine airport from Britain and went almost immediately to his first press conference. Stewart was an outsider. He had been the head of NAB’s British operations for just six months after a long career in banking, mostly as head of the Woolwich Building Society.

At the end of his first week, Stewart, not mincing words, told the ABC the remedial work in the bank could hit profits. “That’s a price that we may have to pay. You’ve got to remember this bank has taken a huge hit in terms of its reputational risk, and that’s not something I’m prepared to ­continue with. So we’ve got to make sure we repair the bank’s reputation.”

Things got worse. On February 16, the chairman Charles Allen resigned. NAB appointed director Graeme Kraehe as chairman. His appointment was soon mired in boardroom battles linked to the array of investigations into the forex scandal. Three months later, in May 2004, Kraehe announced he would retire from the NAB board the following year. Two other directors, Ken Moss and ­Edward Tweddell, announced they would retire too.

On March 12, after receiving a PwC report on the scandal, Stewart moved dramatically — slashing networks and managerial reporting lines with sackings and resignations all the way up the line.

The rogue traders were fired, together with their supervisor (who said he was a scapegoat); Stewart moved on the executive management team, ousting three top managers: the head of corporate and institutional banking, the head of risk management, and the head of markets. “The reason they are leaving is because I have lost confidence in them, as has the board,” Stewart said — a display of plain speaking rare at the top of the banking industry.

In April the chief financial officer resigned, taking early retirement. Dozens of other senior staff were moved or removed. On March 24, eight weeks after the first January shockwaves, APRA threw the book at the bank. The full NAB APRA report (still available with two clicks on the website of the US Securities & Exchange Commission) was immediately ­released by the bank, with then chair Kraehe declaring that due to exceptional circumstances — and after consultations with APRA — the board had resolved to put the report out to the public. It showed courage and conviction at the top, and the bank’s commitment to overhaul the failures of corporate governance.

NAB chief executive officer John Stewart overhauled NAB’s management

APRA found that while the NAB board was responsible for overall governance and high-level risk monitoring and oversight, the level of risk reporting going to the board was inadequate. Cultural ­issues, the regulator said, were at the heart of the failings.

It drew attention to two separate letters sent by APRA to management in 2003 that questioned the strength of NAB’s risk-management controls — letters that had never made it to the board.

The report described the NAB culture as contributing to control breakdowns that led to the ­currency losses. It cited the wider environment in the bank and the attitudes of key decision-makers to principles of risk management, transparency and candour.

The report found that a lax ­attitude to risk went right through the bank. It noted “the profit ­motive or performance culture, and its skewing of the ‘business partnership’ balance between risk management and business ­decision-making”. It noted “a close management of information flows that discourages the escalation of issues of concern to the board or to relevant external parties (such as APRA)”.

It slated considerable responsibility for the fiasco to the board. “The board was not sufficiently proactive in risk issues, it paid insufficient attention to risk and until it belatedly set up a specific risk committee, was content to just leave this to an audit committee.”

Speaking publicly several months later, Stewart drew attention to the PwC report and its reference to the NAB’s “good news culture”. “Now a good news culture is fine apart from if it prevents bad news coming up and I think it does,” Stewart said reflectively.

Aside from the hugely different circumstances of the big bank scandals 13 years apart — one brought on by four arrogant NAB traders making huge losses in ­foreign currency then fraudulently covering their tracks, the other stemming from failures in a CBA hi-tech reporting system — the responses of the two institutions have also been worlds apart.

CBA chief executive Ian Narev announced 10 days after the first Austrac allegations that he would leave the bank at the end of the 2018 financial year. His chairman Catherine Livingstone carefully distanced the announcement from the money-laundering reporting scandal. It was, she said, simply in response to market queries going on for some time about Narev’s tenure — and would give clarity so that everyone could focus on the job at hand.

Livingstone was in a difficult spot, but plain speaking this was not. Everything sounded more like it had been through three mincing machines in the lawyers’ offices and then another two in the PR ­office. Narev, she said, had the full confidence of the board. The board, she added, would be looking for someone with a very strong moral compass.

Outgoing Commonwealth Bank CEO Ian Narev. Picture by James Croucher

The person they found was the insider, Matt Comyn, preferred successor of Narev. Comyn also headed CBA’s retail division — where problems with the smart ATM’s have occurred. He had been appointed to that job by Narev in 2012, taking over from Ross McEwan, who quit after being overlooked in favour of Narev as CEO. McEwan now runs the giant Royal Bank of Scotland.

McEwan himself was regarded as the leading international candidate to replace Narev. He was an outside-insider. He had been away for six years but he knew the bank and he knew the retail division. Whether the CBA board had ­reservations, fearing the loss of Comyn if McEwan won the race, is unknown. McEwan was said to have withdrawn. What position Narev took — if any — in the ­succession discussions is unknown too. Livingstone said that the ­appointment of an insider, in Comyn, meant no loss of momentum for the bank in dealing with cultural areas.

New CEO of the Commonwealth Bank Matt Comyn. Picture by James Croucher

Still, a hypothetical CBA ­investor could be forgiven for a ­hypothetical question: how does a new CEO who has been part of a bank’s culture for years turn over all the stones?

CBA took swift action on the Austrac scandal, setting up a board inquiry and cutting executive ­bonuses. But its aggressive posture was clear when it called the ­problems “one” reporting breach, not 50,000, and started shifting blame on to Austrac for not signalling that legal action was contemplated.

What the APRA panel has to say on CBA’s governance, culture and accountability comes up next on April 30. Stay tuned.