Westpac NZ hit with a public shaming over its culture around how it approached liquidity risk compliance that resulted in 'material failures'

Westpac NZ has been hit with a public shaming after the Reserve Bank (RBNZ) found "ongoing compliance issues" involving "material failures" in the way it reported key liquidity details to the regulator.

The RBNZ cites culture issues. The penalty imposed involves the bank holding extra liquid assets.

Westpac was found to be in breach of the requirements of the RBNZ’s Liquidity Policy (BS13), which includes compliance with minimum mismatch ratios. The mismatch ratio is a measure of a bank’s liquid assets, adjusted for expected cash inflows and outflows to mitigate risk during a period of stress.

Westpac was non-compliant with its liquidity requirements because it was not calculating its mismatch ratios correctly. This had a material impact on the bank’s mismatch ratios, with the non-compliance occurring from 2012 to 2020. The calculations have since been corrected and Westpac has progressed a programme of remediation to address the root causes of the non-compliance.

Until the RBNZ is satisfied that Westpac’s remediation work is effective, Westpac’s required holding of liquid assets will be increased via an overlay on its mismatch ratios.

“Westpac NZ needs to take a close look at its risk governance practices. To ensure this happens we are requiring them to provide an independent report that assesses Westpac NZ’s risk governance processes and practices applied by the Westpac NZ Board and executive management,” RBNZ Deputy Governor and General Manager of Financial Stability Geoff Bascand says.

The Reserve Bank has also required that Westpac NZ provides a separate independent report to provide assurance that the actions they have taken to improve the management of their liquidity risks, and the culture surrounding it, are effective. Until the Reserve Bank is satisfied that Westpac NZ’s remediation work is complete and effective, it is increasing the bank’s required holding of liquid assets (cash or assets that can be easily converted into cash)," says Bascand.

For its part Westpac says the liquidity policy issues were previously reported to the RBNZ and the Australian Prudential Regulation Authority (APRA) and also first disclosed in the bank’s September 2020 Disclosure Statement.

"On 1 December 2020 APRA announced actions it was taking against Westpac NZ’s parent, Westpac Banking Corporation, as a result of these issues," Westpac NZ says.

"Westpac New Zealand acknowledges the importance of liquidity and risk governance obligations and will support the independent reviewers to provide the necessary reports to the Reserve Bank. Westpac NZ will also act promptly on any recommendations from the reviews. Westpac NZ has taken a number of steps to improve risk governance but recognises more work is required, and supports the additional oversight that the independent reports will provide."

The RBNZ says it's confident Westpac NZ’s current liquidity and funding positions are sound, and that the bank is well capitalised. It says the reviews requested are to ensure this remains the case on an ongoing basis.

Here is the statement from the RBNZ:

The Reserve Bank of New Zealand - Te Pūtea Matua has raised concerns around Westpac New Zealand’s risk governance processes and has instructed the bank to commission two independent reports to address them.

“We have experienced ongoing compliance issues with Westpac NZ over recent years, most recently involving material failures to report liquidity correctly, in line with the Reserve Bank’s liquidity requirements. Furthermore, the bank has continued to operate outside of its own risk settings for technology for a number of years,” Deputy Governor and General Manager of Financial Stability Geoff Bascand says.

“Westpac NZ needs to take a close look at its risk governance practices. To ensure this happens we are requiring them to provide an independent report that assesses Westpac NZ’s risk governance processes and practices applied by the Westpac NZ Board and executive management.”

The Reserve Bank has also required that Westpac NZ provides a separate independent report to provide assurance that the actions they have taken to improve the management of their liquidity risks, and the culture surrounding it, are effective. Until the Reserve Bank is satisfied that Westpac NZ’s remediation work is complete and effective, it is increasing the bank’s required holding of liquid assets (cash or assets that can be easily converted into cash).

The independent reviews come under Section 95 of the Reserve Bank of New Zealand Act 1989. This gives the Reserve Bank the power to require a bank to provide a report by a Reserve Bank-approved, independent person. The Reserve Bank will work with Westpac NZ to implement the findings.

It is important to note that the Reserve Bank is confident that Westpac NZ’s current liquidity and funding positions are sound, and that the bank is well capitalised. The reviews outlined today are to ensure this remains the situation on an ongoing basis.