Westpac sees room to improve its risk management

Westpac’s risk and culture review has blamed shortcomings on a ‘less mature’ management of governance risks.

Westpac has found a wide range of shortcomings in its risk and culture review, but has placed the blame on a “less mature” management of governance risks rather than insufficient policies or settings at the bank.

The bank’s self-assessment, submitted to the Australian Prudential Regulation Authority in November last year and released to the public yesterday, recommends 45 actions it can take to remediate some of its shortcomings.

But it warned that as it works to improve management of governance risks, “the maturity gap may contribute to further issues”.

It comes as APRA yesterday forced Westpac, National Australia Bank and ANZ to each carry an extra $500 million in regulatory capital to protect against risks identified in their self-assessment reviews. The 131-page self-assessment outlined deficiencies within Westpac, including a tendency for prioritising ideas over execution, cultivating complexity and gaps in individual accountability.

A “fading of focus” as ideas move on to execution featured widely in the review, the bank said, with consequences including an “execution deficit”, additional costs and a lack of accountability for outcomes.

Meanwhile, its “high level of comfort with complexity” meant there was too much reliance on personal networks, critical employees and ad hoc workarounds.

But the nation’s second largest lender sought to distance itself from its peer, Commonwealth Bank, saying that the bad behaviour seen at CBA was not present to the same extent at Westpac.

“The prominent behavioural characteristics at CBA identified by the prudential inquiry, particularly a sense of chronic ease, complacency, and certain govern­ance-related issues, are not similarly prominent at Westpac,” the bank said.

It did, however, admit that some of the less central and determinative findings at CBA were relevant to Westpac’s own experience. These included a lack of clarity on accountabilities and consequences, and challenges in rapidly identifying, escalating and remediating issues.

Westpac is the second of the big banks to release its self-assessment to the public. It follows NAB’s release of its review in November 2018. It is not believed ANZ will be making its review public. The bank’s self-assessments were requested by APRA in May last year after it had completed its inquiry into CBA’s culture and forced it to hold $1 billion in additional capital to mitigate against the risks identified in its governance.

“Although the self-assessments raised no concerns about financial soundness, they confirmed that many of the issues identified in the inquiry were not unique to CBA,” APRA chairman Wayne Byres said yesterday.

Westpac’s review found that management of non-financial risk was not as well understood as it should be and “until awareness of it is more ingrained in the organisation, it is likely that some employees will make inappropriate trade-offs (such as between perceived demands of service and the requirements of compliance) that could have adverse consequences”.

The review also found that its audit department lacked a “voice” at times and tended to focus on certain risks only after they were highlighted by a regulator. This indicated “gaps in skills and capabilities needed to confidently discern the full gravity of certain matters in the absence of external reinforcement”, the bank said.

Budget targets were another issue. “There was significant pressure to ensure that a project did not exceed initial high-level cost estimates, which exacerbated the risks and challenges that Westpac faced,” the review said.