'Very disappointed' RBNZ increases Westpac NZ's capital requirements after 'material failure' to meet regulatory capital requirements

The Reserve Bank has given Westpac NZ, the government’s bank, 18 months to get its capital in order after an independent report found the bank to be using a series of unapproved capital models. 

As reported by interest.co.nz last December, a series of errors in Westpac’s capital modelling dating back as far as eight years meant the bank breached its conditions of bank registration.

Westpac, along with New Zealand’s other Australian owned banks, is allowed to develop its own models to quantify required capital for credit risk and then get these approved by the Reserve Bank. All other NZ banks have the Reserve Bank prescribe their credit risk measurements. However, the Reserve Bank says Westpac used a number of models that had not been approved by the Reserve Bank, and “materially failed” to meet requirements around model governance, processes and documentation.

“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand says.

The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found 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 regulator has decided Westpac NZ’s conditions of registration will be amended to increase its minimum capital levels until its shortcomings and non-compliance are remedied. 

“Westpac’s minimum capital ratio requirements will be 6.5% for Common Equity Tier 1 [CET1] capital, 8% for Tier 1 capital and 10% for Total capital, with the additional 2.5% capital conservation buffer applying. Currently, for all other locally incorporated banks capital ratios are set at, respectively, 4.5%, 6% and 8%, plus the 2.5% buffer,” the Reserve Bank says.

“In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1% until all existing issues have been resolved. The Reserve Bank has given Westpac 18 months to satisfy the Reserve Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.”

“We believe the regulatory action is appropriate given the seriousness of Westpac’s non-compliance and the need to protect the integrity of the capital regime,” says Bascand.

Westpac NZ ‘disappointed not to have met RBNZ’s requirements’

Westpac NZ says its current regulatory capital ratios are sufficient to accommodate the increases with its total capital ratio at 30 September at 16.1%. The bank says it’s disappointed not to have met the Reserve Bank’s requirements.

“The Reserve Bank has acknowledged that Westpac NZ’s capital has remained well above required regulatory levels,” Westpac says.

As at 30 September, Westpac NZ’s regulatory capital ratios were 11.1% for common equity Tier 1 capital, 14.0% for Tier 1 capital, and 16.1% for Total regulatory capital.

The Reserve Bank is currently undertaking its biggest ever review of New Zealand banks’ capital requirements.

Below is the full Reserve Bank statement.

Westpac capital requirements increased after breaching regulatory obligations

Westpac New Zealand Limited (Westpac) has had its minimum regulatory capital requirements increased after it failed to comply with regulatory obligations relating to its status as an internal models bank.

Internal models banks are accredited by the Reserve Bank to use approved risk models to calculate how much regulatory capital they need to hold. Westpac used a number of models that had not been approved by the Reserve Bank, and materially failed to meet requirements around model governance, processes and documentation.

“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand said.

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 has 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.  Westpac’s minimum capital ratio requirements will be 6.5 percent for Common Equity Tier 1 capital, 8 percent for Tier 1 capital and 10 percent for Total capital, 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 percent, 6 percent and 8 percent, plus the 2.5 percent buffer.

In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 percent until all existing issues have been resolved.  The Reserve Bank has given Westpac 18 months to satisfy the Reserve Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.

“We believe the regulatory action is appropriate given the seriousness of Westpac’s non-compliance and the need to protect the integrity of the capital regime,” Mr Bascand said.

The Reserve Bank has taken into account that Westpac has not deliberately sought to reduce its regulatory capital. While there have been serious shortcomings and 
non-compliance, it appears that Westpac has remained well above its required regulatory capital levels.

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 percent.

And here’s a statement from Westpac NZ

The Reserve Bank of New Zealand (RBNZ) has informed Westpac New Zealand Limited (WNZL) of its decision following a review of WNZL’s compliance with aspects of its advanced internal ratings-based (IRB) accreditation.  The decision applies only to WNZL and not to Westpac Banking Corporation (including its New Zealand branch).

The RBNZ has raised the bank’s minimum regulatory capital ratios, until issues identified in the review are remediated.  In the case of the common equity capital ratio the minimum has been raised from 4.5% to 6.5%.

WNZL’s current regulatory capital ratios are sufficient to accommodate these increases with the total capital ratio at 30 September 2017 of 16.1% compared to the requirement to maintain the ratio above 15.1% until the issues are remediated.

The review focussed on the manner in which WNZL operated its credit risk rating system and the extent to which it sought required approvals from the RBNZ to changes in its credit risk models. WNZL is disappointed not to have met the RBNZ’s requirements in this area.

The RBNZ has acknowledged that WNZL’s capital has remained well above required regulatory levels.

WNZL has publicly disclosed its non-compliance with aspects of the RBNZ’s IRB framework in its Disclosure Statements since September 2016.

WNZL acknowledges the high standards required of an IRB accredited bank and has already taken several steps to address the issues raised in the review. WNZL looks forward to working with the RBNZ over the next phase of remediation work.

The new minimum regulatory capital ratios from 31 December 2017 will be 6.5% for Common equity Tier 1 capital, 8% for Tier 1 capital, and 10% for Total regulatory capital.  As at 30 September 2017, WNZL’s respective minimum capital ratios were 4.5%, 6% and 8%. WNZL has also undertaken to maintain its total regulatory capital ratio above 15.1% during the period of remediation.

As at 30 September 2017, WNZL’s regulatory capital ratios were 11.1% for Common equity Tier 1 capital, 14.0% for Tier 1 capital, and 16.1% for Total regulatory capital.

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