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The major bank must hold more capital after the regulator indicated “long-standing concerns” over ANZ’s non-financial risk management practices and risk culture.
The Australian Prudential Regulation Authority (APRA) has raised the capital add-on applied to Australia and New Zealand Banking Group (ANZ) from $750 million to $1 billion.
The regulator has also accepted a court enforceable undertaking (CEU) from ANZ to address “ongoing weaknesses in the bank’s non-financial risk management practices and risk culture”.
The latest increase comes after APRA increased the $500 million operational risk capital add-on (applied in 2019) by $250 million last year.
APRA said that it had “long-standing concerns” over ANZ’s non-financial risk management practices and risk culture.
These include weaknesses in the lender’s operational risk and compliance management and a reactive risk culture.
APRA said that it has been taking measures through reviews and engagements with the major bank to supervise ANZ’s remediation of these weaknesses.
However, the watchdog also said that it had “observed that these weaknesses remain present across the bank”.
In August 2024, APRA announced several measures in response to issues relating to employee conduct and non-financial risk management in ANZ’s Global Markets business.
That led the regulator to require ANZ to commission an independent review to determine the root causes of the issues, whether they extend beyond the Global Markets business, and if the bank’s existing multi-year remediation program would be sufficient to address them.
APRA said the review’s findings had lent further credence to its concerns.
While the review did note some improvements in the culture, conduct, and risk governance in ANZ’s Global Markets business, it identified root causes that contributed to the “emergence and persistence of risk governance shortcomings”.
It also warned that shortcomings identified in ANZ’s Global Markets business may be present in other parts of the bank.
APRA said that ANZ had made progress on its remediation program to implement a group-wide non-financial risk management framework, system, and operating model.
However, APRA also said that the completion of the program alone “will not effectively and sustainably address the broader non-financial risk weaknesses across ANZ”.
What’s in the enforceable undertaking?
Under the terms of the CEU, ANZ has agreed to:
- Appoint an independent reviewer to complete a group-wide review of root causes and behavioural drivers of the persistent weaknesses in non-financial risk management practices and risk culture and to conduct a gap analysis against current or planned remediation work.
- Develop a comprehensive remediation plan to address the root causes.
- Appoint an independent reviewer to provide assurance over the execution of the remediation plan.
- Provide a written attestation from the relevant accountable person, the chair of the board risk committee, and/or the chair of the board audit committee to APRA once ANZ is satisfied that the remediation activities under the plan have been completed and the target states substantially achieved.
- Incorporate accountabilities for delivery of the remediation plan into the accountability statements for accountable persons required under the financial accountability regime and to reflect this accountability in the remuneration scorecards.
Next steps
The $1 billion capital add-on will remain in place until ANZ has delivered the required remediation to APRA’s satisfaction.
APRA chair John Lonsdale said the regulator was not prepared to wait for the possibility of a serious prudential problem occurring before taking action.
“ANZ remains financially sound with robust levels of capital and liquidity, however problems with the bank’s management of non-financial risks are persistent and prevalent across the bank,” Lonsdale said.
“APRA has seen how long-standing non-financial risk management weaknesses have manifested in material prudential issues at some of ANZ’s peer banks. We have observed some similar weaknesses at ANZ and require these to be addressed as a priority.
“ANZ has offered the CEU to APRA in response to the concerns I have raised directly with the ANZ board, including the chair. They have assured me that they are fully committed to the undertakings in the CEU and will provide strong stewardship to ensure a successful remediation program.”
In response to APRA’s decision, ANZ chairman Paul O’Sullivan said: “We are disappointed that we have not met APRA’s expectations about how the bank manages non-financial risk and its non-financial risk culture. A strong non-financial risk regime is critical to protecting our bank and our customers.
“While APRA has recognised the bank has a significant agenda of non-financial risk work underway and has made some progress with improving our practices, we recognise we have more work to do to uplift our management of non-financial risk and to improve risk culture across the bank.”
ANZ CEO Shayne Elliott said: “While the bank remains in a strong financial position with strong capital and liquidity levels, we know we have more work to do in the coming two to three years to boost our uplift of non-financial risk practices.”
It has been an active couple of months for the regulator.
In February, it began a consultation period on proposed changes to how banks treat student debt repayments and last month, it said that some mutuals lack the skills to navigate a modern banking environment.
[Related: Mutuals vulnerable to rapidly changing banking landscape, APRA warns]
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