Investors have again ignored the step-up in regulatory action against Westpac by the key overseer, APRA.
Fresh from criticising the bank (the country’s second-largest) immature culture and poor oversight on responsibilities in risk management and assessment earlier in the week, Westpac shares dipped by just 0.5% to $20.20 yesterday after APRA revealed it had forced the bank to agree to a court-enforceable undertaking (or CEU) to lift its game.
In a statement yesterday morning from APRA, Westpac was threatened with court action if it fails to improve long-standing weaknesses in its risk governance that continue to create plague the bank.
APRA said the CEU was aimed at getting Westpac to “lift substantially its efforts to address risk governance deficiencies” after finding the bank’s internal programs had achieved little.
The regulator conducted a review of Westpac’s risk frameworks (the way it assesses and handles risk associated with customers and other) following the anti-money laundering action from AUSTRAC that ended up seeing CEO, Brian Hartzer, other executives, directors, and the then chairman depart.
This week APRA found that the bank has stuffed up two key liquidity standards that had now been rectified.
But the regulator made it clear it wasn’t happy and has more action planned.
APRA said in Tuesday’s statement that it will take enforcement action against after a review uncovered material breaches liquidity standards.
APRA on Tuesday said breaches, which were identified during 2019 and 2020, relate to the incorrect treatment of specific funding and loan products for the purposes of calculating the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
“In particular, APRA identified that Westpac has an immature and reactive risk culture, unclear accountabilities, capability shortfalls and inadequate oversight,” Westpac said.
While the breaches have been rectified, and do not raise concerns about the overall soundness of Westpac’s current liquidity position, APRA said they believe they “demonstrate weaknesses in risk management and oversight, risk control frameworks and risk culture”.
“As a result, APRA will now require comprehensive reviews by independent third parties of Westpac’s compliance with APRA’s liquidity reporting requirements and the remediation of its control framework for liquidity risk management.
APRA found Westpac’s internal program to improve its risk was “not sufficiently far-reaching” to tackle “wide-ranging risk governance gaps and carries high execution risk”.
“The CEU comes after APRA expressed concerns with the bank’s progress in remediating weaknesses including an immature and reactive risk culture, unclear accountabilities, capability shortfalls, and inadequate oversight,” APRA said on Thursday.
The CEU requires Westpac to develop a new plan that covers financial and non-financial risks, obtain independent oversight of the implementation of that plan and assign executives and board members personally responsible for progress.
APRA deputy chair John Lonsdale said in the statement Westpac’s culture and governance required a “substantial uplift” as ongoing failures continue to create new prudential problems.
“As one of the country’s largest and most important financial institutions, Westpac should be a leader in risk management,” Mr Lonsdale said. “Although the bank has made progress in some areas over the past year, it is not good enough.”
APRA had communicated with the board directly over the matter and noted a CEU was a “serious step that indicates the severity of the situation”, Mr Lonsdale said.
In a separate statement Westpac Group CEO, Peter King, said the bank “acknowledges the findings of the APRA review and is determined to deliver on its risk remediation activities.”
“My top priority is to ensure the bank’s risk culture and management of risk meet the high standards expected of us. We have had constructive discussions with APRA and know we have to deliver a disciplined step change in our management of financial and non-financial risk.
“While we have made progress in improving our standards, we have much more work to do, and this must be done at pace,” he said.
