In a couple of recent developments, APRA granted a limited authorized deposit-taking institution license to TransferWise Australia Pty Limited and took enforcement action against Westpac Banking Corporation. The action against Westpac is in response to the material breaches of the APRA prudential standards on liquidity. The breaches, which were identified during 2019 and 2020, relate to the incorrect treatment of specific funding and loan products for calculating the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).
Although these breaches have been rectified and do not raise concerns about the liquidity position of Westpac, APRA believes that these breaches demonstrate weaknesses in risk management and oversight, risk control frameworks, and risk culture. APRA will now require comprehensive reviews, by independent third parties, of Westpac’s compliance with the liquidity reporting requirements of APRA and the remediation of its control framework for liquidity risk management. Until the findings from the independent reviews are addressed to the satisfaction of APRA, APRA will also require Westpac to apply a 10% add-on to the net cash outflow component of its LCR calculation. In December 2019, APRA had commenced a risk governance review into Westpac and applied a $1 billion capital add-on to Westpac’s operational risk capital requirement, in response to allegations by AUSTRAC that Westpac had breached anti-money laundering laws. The review of APRA is ongoing and the capital add-on will remain in place until APRA is satisfied that deficiencies in risk governance have been adequately remediated.
In a more recent development in the Westpac compliance assessment, APRA has concluded that Westpac has failed to deliver the expected risk governance improvements despite almost two years of remediation. This has undermined the confidence of APRA in Westpac’s ability to remediate these weaknesses in a timely manner. Westpac has acknowledged these concerns of APRA and a recently signed Court Enforceable Undertaking (CEU) requires Westpac to:
- Develop an integrated plan that incorporates all its major risk governance remediation programs, covering both financial and non-financial risks
- Obtain independent assurance over the implementation of the plan with direct reporting to APRA
- Assign accountabilities for delivery of the plan to named executives and Board members and incorporate outcomes into remuneration decisions
Keywords: Asia Pacific, Australia, Banking, LCR, Westpac, Transferwise Australia, NSFR, Liquidity Risk, Basel, Governance, Compliance Risk, APRA
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