New Zealand Stock Markets
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.
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.
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.
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.
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.
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