The Australian Prudential Regulation Authority has found that Westpac breached the prudential standard on liquidity and has ordered the bank to bring in an independent third party to review its compliance with liquidity reporting requirements. It has also imposed a liquidity overlay.
The breaches, which were identified last year and this year, relate to incorrect treatment of specific funding and loan products for the purposes of calculating the bank’s liquidity coverage ratio.
Under the LCR rule introduced in 2015 ADIs must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days.
To determine the appropriate LCR, banks must estimate their net cash outflow over 30 days under stressed conditions, with higher runoff rates to apply to less stable deposits.
The Reserve Bank offers a committed liquidity facility to make up for any shortfall in high-quality liquid assets.
Westpac’s independent reviewer will also assess the bank’s remediation of its control framework for liquidity risk management.
APRA said in a statement that the breaches have been rectified and do not raise concerns about the overall soundness of the bank’s current liquidity position.
However, APRA “believes they demonstrate weaknesses in risk management and oversight, risk control frameworks and risk culture”.
Westpac said in a statement that its LCR for the September quarter was 151 per cent – well above the regulatory minimum.
APRA has applied an overlay on the bank’s liquidity requirements by adding a 10 per cent increase to estimated net cash outflows. The overlay will be put in place in January and will be in place until all shortcomings have been rectified.
Westpac said APRA had also notified it of the progress of its review of the bank’s risk governance.
“APRA identified that Westpac has an immature and reactive risk culture, unclear accountabilities, capability shortfalls and inadequate oversight,” the bank said.
These findings are in line with the bank’s own culture, governance and accountability assessment, released in July.
The bank has commenced a number of risk programs but “APRA has indicated that Westpac has not demonstrated the expected improvements from these programs and that a more holistic and integrated program addressing the full scope of financial and non-financial issues, and their root causes, is required.”
The bank said it expects the next step will be an enforceable undertaking over risk governance remediation.