The Reserve Bank of New Zealand has announced that Westpac New Zealand failed to comply with regulatory obligations relating to its status as an internal model bank.The RBNZ, in a media statement said that internal model banks are accredited by the Bank to use approved risk models to calculate how much regulatory capital they need to hold. In this context, the Reserve Bank said Westpac NZ "used a number of models that had not been approved by [the Bank] and materially failed to meet requirements around model governance, processes, and documentation."As a consequence, the Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found that Westpac: currently operates 17 (out of 35) unapproved capital models; has used 21 (out of 32) additional unapproved capital models since it was accredited as an internal models bank in 2008; and failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.The Reserve Bank said it had decided that Westpac's conditions of registration should be amended to increase its minimum capital levels until the shortcomings and non-compliance identified in the independent report have been remedied, that is: Common Equity Tier 1 capital: 6.5 per cent; Tier 1 capital: 8 per cent; and Total capital: 10 per cent, with the additional 2.5 percent capital conservation buffer applying. Currently, for all other locally incorporated banks capital ratios are set at, respectively, 4.5 (CET1) per cent, (Tier 1) 6 per cent and 8 per cent, plus the 2.5 per cent buffer.In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 per cent until all existing issues have been resolved. RBNZ has given Westpac 18 months to satisfy the Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.Westpac has confirmed that it does not dispute the findings of the independent report, that it is committed to remedying all the issues identified, and that it will maintain its total capital ratio above 15.1 per cent.