The Australian Prudential Regulation Authority (APRA) will reduce the $1 billion capital add-on applied to Westpac Banking Corporation by $500 million in response to the bank’s progress in improving its risk governance, culture and risk management, the regulator said on Friday.
In a statement, APRA confirmed that it had imposed a $500 million capital add-on on Westpac in July 2019 to reflect the higher operational risk identified in the bank’s risk governance self-assessment.
At the time, it had also written to ANZ and National Australia Bank (NAB) advising of an increase in their minimum capital requirements of $500 million each.
“The capital add-ons will apply until the banks have completed their planned remediation to strengthen risk management, and closed gaps identified in their self-assessments,” APRA stated.
An additional $500 million capital add-on was then imposed on the big four bank in December 2019 to reflect the “heightened” operational risk profile of the bank, primarily due to risk governance concerns.
The prudential regulator recounted that Westpac then entered a court-enforceable undertaking (CEU) with APRA in December 2020, where it committed to “remediating weaknesses” in its culture, governance and accountability, and address the root causes of these issues.
In response, the bank established the Customer Outcomes and Risk Excellence (CORE) program and appointed an independent reviewer.
“In recognition of the progress and improvements delivered by Westpac under CORE, APRA has halved the add-on to its operational risk capital requirement, effective immediately,” APRA noted.
The remaining $500 million capital add-on, the prudential regulator clarified, will remain in place until Westpac completes its transition work and APRA undertakes further validation work to assess the sustainability of improvements made in risk governance, culture, and accountability practices and outcomes.
In September 2022, APRA also removed the remaining $500 million capital add-on applied to the Commonwealth Bank (CBA).
APRA originally imposed a $1 billion add-on to CBA’s operational risk capital requirement in 2018, forming part of its response to the final report of the prudential inquiry into the bank.
According to the inquiry, CBA’s “continued financial success dulled the senses of the institution”, particularly in relation to the management of non-financial risks, and weaknesses were identified in its governance, accountability, and risk culture frameworks and practices.
