Whilst ANZ NZ hogs the bank capital misdeeds headlines, Westpac NZ is poised to deliver its response to the RBNZ after being caught out using unapproved capital models 2 years ago

Whilst ANZ NZ hogs the bank capital misdeeds headlines, Westpac NZ is poised to deliver its response to the RBNZ after being caught out using unapproved capital models 2 years ago

ANZ New Zealand may be hogging the headlines when it comes to capital misdeeds among the major banks, but don't forget about Westpac NZ.

The Reserve Bank expects to receive a submission from Westpac NZ this week following an 18 month remediation programme after the bank was found to be using a series of capital models that hadn't been approved by the Reserve Bank.

"I can advise that we expect to receive the submission from Westpac by the end of this week. We will then review it and make decisions on Westpac’s capital requirements in due course," a Reserve Bank spokeswoman told interest.co.nz on Monday.

In May's Financial Stability Report the Reserve Bank noted that it imposed higher minimum regulatory capital requirements on Westpac in November 2017 after an independent review found the bank had failed to comply with regulatory obligations relating to its status as an internal models (capital) bank.

"Westpac has been undertaking a remediation programme that includes the development of a new suite of credit risk models and improvements to its internal controls and model governance. It is expected to provide a submission to the Reserve Bank detailing its remediation work in June 2019. Higher minimum capital requirements will continue to be imposed on Westpac until the Reserve Bank makes its final assessment of that submission," the Reserve Bank said in May.

In its latest general disclosure statement Westpac NZ said it's "making good progress with remediating issues" that emerged in 2017.

In 2017 the Reserve Bank said the independent report found Westpac NZ was operating 17 out of 35 unapproved capital models, had used 21 out of 32 additional unapproved capital models since it was accredited as an internal models bank in 2008, and had failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

Consequently the Reserve Bank moved to increase Westpac NZ's regulatory capital requirements until the shortcomings and non-compliance identified in the independent report are remedied.

"Westpac’s minimum capital ratio requirements will be 6.5% for Common Equity Tier 1 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 announced in 2017.

"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."

The Reserve Bank added that it had taken into account that Westpac hadn't deliberately sought to reduce its regulatory capital, saying it appeared that Westpac had remained well above its required regulatory capital levels.

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Is a financial penalty considered appropriate for a situation where a bank had gained an advantage by misstating it's position?