The Australian Prudential Regulation Authority (APRA) will reduce the $1 billion capital add-on applied to Commonwealth Bank of Australia (CBA) by $500 million in response to the bank’s progress in addressing concerns over its governance, accountability and risk culture frameworks and practices.
APRA imposed the capital add-on on CBA in May 2018 as part of its response to the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia. The Inquiry, which followed a series of incidents that damaged the bank’s public standing, concluded that “CBA’s continued financial success dulled the senses of the institution", particularly in relation to the management of non-financial risks.
At that time, CBA gave APRA an Enforceable Undertaking (EU), which committed to addressing the findings detailed in the Final Report, and APRA imposed a $1 billion add-on to CBA’s operational risk capital requirement. Under the terms of the EU, a Remedial Action Plan (RAP) was provided to APRA for approval, and CBA appointed an Independent Reviewer to report quarterly on progress against the RAP.
The latest quarterly report from the Independent Reviewer indicated that CBA has made significant progress in executing the RAP. Recent work by APRA to validate CBA’s progress against the RAP, in areas such as risk management and compliance, remuneration and risk culture, supports that assessment, although a substantial body of work is needed to ensure the improvements are fully embedded across the whole CBA Group.
In recognition of the work undertaken by CBA to date, APRA has reduced the add-on to its operational risk capital requirement to $500 million, effective immediately. The remaining $500 million capital add-on will remain in place until CBA finalises all of the matters covered by the RAP, addresses all the Final Report recommendations, and APRA undertakes further validation work to assess the sustainability of its improvements in governance, accountability and risk culture frameworks, practices and outcomes.