Three of Australia’s ‘Big Four’ banks – ANZ, NAB and Westpac – have each been asked to set aside A$500 million (US$351 million; €313 million) in additional capital buffers until ongoing culture, governance and misconduct risks are resolved.

The request comes from the Australian Prudential Regulation Authority (APRA), which says that the aggregate A$1.5 billion total will be applied through increased risk weighted assets (RWA) from Q4 2019.

APRA ordered 36 of the country’s banks, insurers and superannuation licensees in June 2018 to undergo rigorous self-assessments after ordering Commonwealth Bank of Australia (CBA) – the other member of the Big Four – to set aside A$1 billion in regulatory capital after failings.

The additional capital requirements will not be lifted until each group completes planned remediation, improves risk management and achieves all self-assessment goals including the need to strengthen non-financial risk management, ensure accountabilities are clear, cascaded and enforced, address long-standing weaknesses and enhance risk culture.

Room for improvement

The main findings of APRA’s review of self-assessments were that non-financial risk management requires improvement, accountabilities are not always clear, cascaded and effectively enforced, acknowledged weaknesses are well-known and some have been longstanding and risk culture is not well understood and therefore may not be reinforcing the desired behaviours.

APRA believes the Big Four continue to misidentify risk, citing the examples of CBA’s breaching anti-money laundering (AML) laws. CBA incurred a A$700 million fine in June 2018, the largest civil penalty in Australian corporate history. It is expected that rising capital adequacy requirements will crimp dividend growth as customer remediation costs escalate to A$8 billion, following findings from the year-long 2018 Royal Commission into Misconduct in the [Australian] Financial Services Industry.

The country’s major players have already allocated over A$5 billion in customer remediation since 2017 while APRA had earlier announced that the Big Four would have to increase capital adequacy by three basis points of RWA by 1 January 2024, which is less than the expected five percentage point increase and over a longer timeframe.

The prudential regulator announced that it expects the new requirements to strengthen the loss-absorbing capacity of the major banks by A$50 billion in total with a slight bump in funding costs of under five basis points.

NAB and Westpac confirmed that the additional A$500 million of operational risk capital equates to an impact of 16 basis points on their Common Equity Tier 1 capital ratio (CET1). For ANZ it equated to a CET1 impact of 18 basis points.

Addressing the weak spots

“Australia’s major banks are well-capitalised and financially sound but improvements in the management of non-financial risks are needed,” stated APRA chair Wayne Byres. “This will require a real focus on the root causes of the issues that have been identified, including complexity, unclear accountabilities, weak incentives and cultures that have been too accepting of long-standing gaps.

“The major banks play a vital role in the stability of the entire financial system, and APRA expects them to hold themselves to the highest standards of risk governance. Their self-assessments reveal that they have fallen short in a number of areas, and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated.”

NAB claims that A$170 million has been repaid to customers in the 2018/19 financial year and small-business complaints have halved since Q4 2018.

Westpac stated that it has made “20% progress” on the actions it identified for improving its culture, governance and accountability self-assessment while ANZ did not provide a progress update on its “self-assessment roadmap”. The increased operational risk capital requirement is effective from 30 September 2019.

“NAB will report on the 26 actions identified in the bank’s self-assessment on culture, accountability and governance in November 2019,” said the bank’s CEO Philip Chronican. “The assessment sets out a clear programme of reform to strengthen non-financial risk management and material progress has been made so far.

“The board customer committee is now in place and has approved a new customer outcomes framework to define the principles and standards in the design, pricing and structure of all NAB products,” he added.