Banking royal commission: big four bank’s fears and failings laid bare in deep dive into APRA papers

The Australian 12:03pm December 13, 2018

Chris Jenkins

A treasure trove of the big banks’ fears and failings has been unearthed by a review of communications with regulators submitted to the Hayne royal commission.

The royal commission required banks to submit countless documents detailing their activities, including records of conversations and correspondence that executives and directors had with industry regulator the Australian Prudential Regulation Authority.

Summarised in a research note by investment bank UBS carrying the title “APRA uncut — the raw conversations APRA had with the banks”, the documents show, among other things, that Commonwealth Bank CEO Matt Comyn was keen to know if his organisation performed the worst of the banks on APRA’s targeted review so that he could use the information to spur staff to fix problems.

“APRA was quick to point out that all of them [major banks] failed the Targeted Review. Note being the best of a bad bunch is not necessarily good. CBA should not just strive to be the best of the majors but keep pushing for continued improvement,” notes from APRA’s prudential consultation with CBA in May show.

APRA officials told CBA, the nation’s biggest mortgage lender, that its lending policies were “falling short of APRA’s expectations in a number of areas”, but also told the bank that it was expected to be an industry leader in managing the risks on its mortgage book.

Mr Comyn also told APRA that CBA’s attempt at the “bancassurance” business model, which combines retail banking with wealth management and insurance, had “categorically failed”, with the culture within the Colonial business very different to the rest of the bank.

CBA was however given credit for its “BROP” (Better Risk Outcomes Program) initiative, which indicated to APRA “that there appears to be more genuinely good intentions to address issues”.

Westpac CEO Brian Hartzer told APRA that he considered the prudential review of CBA a “brilliant piece of work” but thought it unfair that other banks be asked to go through a similar process.

Mr Hartzer conceded that his own bank had never really finished off its acquisition of one-time NSW rival St George, leaving it with duplicate systems, old products and inconsistent policies.

Meanwhile, the possibility of multiple inquiries and regulatory reviews tying the banks up in knots was what was keeping ANZ CEO Shayne Elliot awake at night, the documents reveal. His deputy CEO Graham Hodges, meanwhile, fretted that a Labor government in Canberra could kick off a new round of inquiries.

Mr Elliott also told regulators that he was worried one of the unintended consequence of increased regulation could be that more vulnerable customers and small businesses, to whom lending carried greater risks for the banks, might be forced to seek finance from unregulated parts of the market because they wouldn’t be able to meet the more stringent requirements that the regulations would require.

In their minutes of a meeting with ANZ in March, APRA officials noted that Mr Elliott “opined that the wealthy will always be able to have access to credit, but the less wealthy will be pushed into the margins. Does it matter to ANZ? Not really. But, they do feel that there are consequences for the system in general.”

The documents also show that risk governance issues were apparent at NAB years before chairman Ken Henry’s much-discussed appearance as a witness at the royal commission.

“Over the past few years, APRA has observed a significantly higher number of breaches of prudential standards relative to peers. NAB internal audit has also identified material concerns with the bank’s management of compliance, and a number of compliance controls appear to be ineffective,” APRA said in a letter to Mr Henry in July 2016.

“In APRA’s view, an effective compliance framework should establish and maintain

reliable controls that can detect and prevent breaches. The series of past control failures suggest that NAB is not yet operating with the level of reliability it needs, both to meet its own risk appetite for compliance and to meet APRA’s expectations of an Advanced Bank.”

In the documents highlighted by UBS, problems caused by banking systems came up regularly.

Westpac told APRA that underlying systems problems were responsible for 68 per cent of its issues.

In discussing its problems with assessing loan serviceability, regulators told CBA that it was in possession of a “wealth of knowledge …. that could be used for better assessing serviceability due to the large customer … base that have a deposit account with CBA.

“CBA acknowledged this however there continues to be issues with the relevant staff being able to access CBA’s own data.”