The Australian Prudential Regulation Authority (APRA) has taken enforcement action against Westpac Banking Corporation (Westpac) in response to material breaches of APRA’s 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 the purposes of calculating the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
While the breaches have been rectified, and do not raise concerns about the overall soundness of Westpac’s current liquidity position, APRA believes they demonstrate weaknesses in risk management and oversight, risk control frameworks and risk culture.
As a result, APRA will now require comprehensive reviews by independent third parties of Westpac’s compliance with APRA’s liquidity reporting requirements and the remediation of its control framework for liquidity risk management. Until the findings from the independent reviews are addressed to APRA’s satisfaction, APRA will also require Westpac to apply a 10 per cent add-on to the net cash outflow component of its LCR calculation.
APRA Deputy Chair John Lonsdale said: “Under APRA’s liquidity requirements, banks must maintain a sound liquidity risk management framework, ensuring accurate calculation of the LCR and NSFR1. While Westpac’s LCR and NSFR are comfortably above regulatory minimums, APRA’s actions reflect how seriously we view breaches of our prudential requirements.”
“In taking these actions, our objective is to obtain assurance that Westpac is complying with APRA’s liquidity requirements. It also sends a message to the wider banking industry that breaches of prudential standards are not acceptable, and APRA will respond as appropriate, including by imposing penalties,” Mr Lonsdale said.
In December 2019, APRA 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. APRA’s review is ongoing, and the capital add-on will remain in place until APRA is satisfied that deficiencies in risk governance have been adequately remediated.
1 For more information on liquidity in banking, see APRA Explains: Liquidity in banking.