The Australian Prudential Regulation Authority (APRA) has completed its investigation into the irregular foreign currency options trading at the National Australia Bank (NAB). Following endorsement by the APRA Members of the remedial actions required by NAB, APRA’s report was presented to a meeting of the NAB Board yesterday.
In view of the substantial public interest in this issue, the NAB Board has decided to release the report in its entirety. APRA has consented to this course of action.
APRA has advised NAB that it must commence a program to implement all the required remedial actions identified in the report, according to timeframes agreed with APRA. In addition, until APRA is satisfied that these actions have been completed:
The NAB has accepted the findings of the report and is now developing a comprehensive remedial program.
- NAB’s internal target capital adequacy ratio is to rise to ten per cent;
- NAB’s approval to use an internal model to determine market risk capital is withdrawn. NAB will be required to calculate its regulatory capital for market risk according to the standard regulatory method; and
- NAB’s currency options desk is to remain closed to corporate business and proprietary trading.
APRA’s Chairman, Dr John Laker, emphasised that, while the governance and risk management weaknesses identified in the report were serious, they did not threaten the bank’s viability or its capacity to meet its obligations to depositors.
“Nonetheless, NAB will need to address these issues promptly so that it meets ‘best practice’ standards in its treasury area and problems of this kind do not recur,” he said.
Following its announcement of 15 January, APRA has also been reviewing the risk management practices of other authorised deposit taking institutions (ADIs) with treasury operations. To ensure that the right lessons are learnt from this episode, APRA will be asking these institutions to satisfy themselves and APRA that they could not face similar problems.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $1.7 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.