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RBNZ revokes ANZ NZ's accreditation to model its own capital requirements due to 'persistent failure' in its controls and attestation, bank must increase minimum capital for operational risk by 60% to $760m

RBNZ revokes ANZ NZ's accreditation to model its own capital requirements due to 'persistent failure' in its controls and attestation, bank must increase minimum capital for operational risk by 60% to $760m

By Gareth Vaughan

The Reserve Bank has revoked ANZ New Zealand’s accreditation to model its own capital requirements for operational risk, citing a persistent failure in controls and the director attestation process at the country’s biggest bank that dates back five years.

The move comes on deadline day for submissions on the Reserve Bank’s proposals to increase banks’ regulatory capital requirements.

 “ANZ is now required to use the standardised approach for calculating appropriate operational risk capital. From March 2019, this will increase its minimum capital held for operational risk by around 60%, to $760 million,” the Reserve Bank says.

ANZ, along with ASB, BNZ and Westpac has been allowed to use what's known as the Internal Ratings Based (IRB) approach to calculate regulatory capital requirements since 2008. That means they set their own models for measuring credit risk exposure, which they must then get approved by the Reserve Bank. In contrast all other New Zealand banks must use the standardised approach through which they have their credit risk prescribed by the Reserve Bank.

Reserve Bank Deputy Governor Geoff Bascand says accreditation to use the IRB approach is earned through maintaining high risk management standards, and comes with stringent responsibilities for a bank’s directors and management.

 “The Reserve Bank’s role is to review and approve internal models. The onus is then on bank directors to ensure, and attest, that their bank is compliant with the Reserve Bank’s regulatory requirements. To do that, bank directors need to be satisfied that the internal assurance processes that sit behind the attestations are being adhered to,” Bascand says.

'A persistent weakness with ANZ’s assurance process'

The bank disclosure regime the Reserve Bank oversees is supported by a requirement for bank directors to attest to, i.e. sign-off on, the accuracy of information contained in bank general disclosure statements. 

But Bascand says; “ANZ’s directors have attested to compliance despite the approved model not being used since 2014. The fact that this issue was not identified for so long highlights a persistent weakness with ANZ’s assurance process.”

Bascand says the Reserve Bank had encouraged ANZ to undertake a full review of its attestation process, and assess its compliance with capital regulations. 

“ANZ’s failure to use an approved model was revealed through that review. A bank's disclosure statement is required to contain certain statements signed by each director of the bank. These must state, among other things: whether the bank has systems in place to monitor and control adequately the banking group's material risks and whether those systems are being properly applied; and whether the bank has complied with its conditions of registration over the period covered by the disclosure statement.”

“These directors’ attestations are important because they strengthen the incentives for directors to oversee, and take ultimate responsibility for, the sound management of their bank. We continue to work with ANZ in assessing its systems controls before determining any further action,” Bascand says.

If a disclosure statement is found to be false or misleading, bank directors can potentially face criminal and civil penalties including a jail term of up to three years.

ANZ NZ's directors are independent directors Tony Carter, Mark Verbiest, Joan Withers and chairman John Key, Shayne Elliott who is CEO of parent the ANZ Banking Group, CEO David Hisco, and Michelle Jablko who is chief financial officer of the ANZ Banking Group. Former prime minister Key joined the board in October 2017 succeeding the departing John Judge as chairman in January 2018.

Asked by if any further action might be taken against ANZ and/or its directors, a Reserve Bank spokesman would only reiterate the comments attributed to Bascand above that; "We continue to work with ANZ in assessing its systems controls before determining any further action."

Problem discovered last month, ANZ says, with capital increased by $277 mln

ANZ, meanwhile, says during a review last month it discovered it wasn’t using an approved model for the calculation of its operational risk capital. Once the mistake was discovered, ANZ says it "promptly escalated" the matter to its board and reported the issue to the Reserve Bank.

"In December 2014, the calculation of operational risk capital was changed to be based on a final run of a previous model, that was decommissioned without Reserve Bank approval, with an annual adjustment to reflect the growth of the ANZ’s business. While isolated, and with no impact on customers or the operation of the bank, ANZ New Zealand is disappointed this error occurred. ANZ New Zealand, its board and its management takes the attestation regime very seriously," the bank says. 

"While ANZ believes it has appropriate controls and attestation processes in place, it will work with the RBNZ in its assessment of those controls and processes. ANZ New Zealand accepts the RBNZ’s decision that the operational risk capital model to be used from now will be based on the Reserve Banks 'standardised approach'. This approach means that as at 31 March 2019, ANZ New Zealand’s operational risk capital requirement increased by $277 million, and its capital ratios have decreased by 0.4% for common equity tier 1 capital and 0.6% for total capital. At 31 March 2019, ANZ New Zealand’s total capital was $12.46 billion," ANZ says.

The bank says it's working to provide the Reserve Bank with further information to show there are no other similar capital model compliance issues. Furthermore ANZ says a governance framework including appropriate systems and controls has been established to ensure Reserve Bank approved models can't be decommissioned without the required approvals.

Attestation regime reviewed at IMF's behest

The Reserve Bank's attestation regime has been a key feature of the regulator's idiosyncratic, hands-off bank supervision regime since the 1990s. In 2017 the Reserve Bank hired Deloitte to review the attestation regime after the International Monetary Fund urged the Reserve Bank to more rigorously test director attestations in its Financial Sector Assessment Program report on New Zealand. obtained a copy of the Deloitte report, and wrote about it here, after an Official Information Act request was initially rejected by the Reserve Bank and we went to the Ombudsman.

The Deloitte review called for a more prescriptive approach to the oversight of bank risk management.

Meanwhile, a key aspect of the Reserve Bank's proposals to increase banks' regulatory capital requirements is to level the playing field between banks using the IRB approach and those using the standardised approach.

In 2017 Westpac was also found to be in breach of credit risk modelling requirements.

The additional information below was released by the Reserve Bank.

Attestation regime

A bank's disclosure statement is required to contain certain statements signed by each director of the bank. These must state, among other things: whether the bank has systems in place to monitor and control adequately the banking group's material risks and whether those systems are being properly applied; and whether the bank has complied with its conditions of registration over the period covered by the disclosure statement.

These directors’ attestations are important because they strengthen the incentives for directors to oversee, and take ultimate responsibility for, the sound management of their bank.

What are capital requirements?

Bank capital is a source of funding that banks use that stand first in line to absorb financial losses they might make. The Reserve Bank, like other regulators around the world, sets the minimum level of capital a bank must use to fund its operations. The more capital a bank has, the less likely it is to fail.

There are three broad types of risks that banks are required to have capital for:

Credit risk - the risk that borrowers will be unable to pay back their loans

Market risk – the risk that a change in market conditions, such as changes in the exchange rate, will cause losses for banks

Operational risk – other risks that relate largely to the systems of a bank, such as a computer systems failure

What is internal modelling?

Locally incorporated banks in New Zealand can calculate their capital requirements in two ways: the internal models approach or the standardised approach.

Under the internal models approach a bank is able to use statistical models to assess the riskiness of its business such as the risk of its mortgage loans, or its level of operational risk. The bank’s internal models need to be approved by the Reserve Bank to ensure they are conservatively designed. Banks also need to meet several qualitative criteria to use this approach, such as proper governance and validation of these internal models. The banks in New Zealand that are accredited to use the internal models approach are ANZ, ASB, BNZ, and Westpac.

Under the standardised approach, the amount of capital that is required is prescribed in a set of formulae by the Reserve Bank.  This approach is simpler for banks to use than the internal models approach and easier to implement.

What is an operational risk model?

Operational risk capital requirements are designed to provide banks with sufficient capacity to absorb a wide range and magnitude of operational risk-related losses (from, for example: inadequate or failed internal processes, people or systems; or from external events, including legal risks). Underestimation of the amount of operational risk capital that a bank needs can undermine a bank’s financial soundness and could make it more likely to fail.

What is the Capital Review?

The Capital Review is a review of the capital requirements that the Reserve Bank sets for locally incorporated banks. It seeks to address several questions about New Zealand’s current framework: What should New Zealand’s risk tolerance be for banking crises? Do banks have sufficient levels of capital? What should the quality of capital be in New Zealand? Should we allow internal modelling for capital requirements? Should there be a significant difference between internal modelling and standardised approaches?

As part of its current Capital Review, the Reserve Bank is reviewing its capital framework for banks. Due in part to proven weaknesses with the internal models approach and in line with moves by other supervisor banks around the world, the review proposes that all banks adopt a new standardised approach for calculating operational risk capital.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


The headline says: "bank must increase capital by $760 million". The article says "this will increase its minimum capital held for operational risk by around 60%, to $760 million."

I'm guessing it's the latter.

Re-read it, they match now.

No, they don't. The title still misses the word "minimum".

Accidents happen........

I'd wager that ANZ bank will cooperate fully with RBNZ and deal with the identified shortcomings rapidly.......

Certainly, ANZ will seek to maintain the confidence of its customers and the public - as it won't want to risk a run on its funds (albeit that's most unlikely with such a "technical"issue).


Apart from an embarrassing headline it means nothing really.. the increase is just to the minimal capital requirement, and ANZ already hold over this amount. A little sensationalist


Look at s156AC. Directors can be prosecuted and receive a prison sentence of 18 months. Now wouldn’t that be fun

No big deal if ANZ lost their bank license either.

You can guarantee that wasn't lost on the directors. There will undoubtedly be some serious questions asked of senior management (albeit belatedly) by the directors.

It would appear that the RBNZ has had concerns for some time and directors should have been aware of them and if they weren't it suggests a significant gap in the management reporting.

For these to surface on the eve of the capital proposals submission process closing it does ANZ no favours in arguing the RBNZ has gone too far with those proposals.


Good. Considering the huge rights and privileges retail banks are allowed in society, it seems ridiculous that they don't have more rigorous external policing of risk capital management and also operations. Their behavior affects us all and ultimately we're on the hock while they try to maximize returns for their shareholders.

Ouch and Wow!

What happens in Ausi doesn't happen in NZ - Yeah Right!

Sir John Key joins ANZ bank as chairman. John Key has officially been appointed as a Knight of the New Zealand Order of Merit. Sir John Key has been named chairman of ANZ Bank's local arm.Oct 18, 2017

Hi NorthernLights,

Yes, indeed - Sir John has certainly had some notable career achievements.

I reckon he'll go on to achieve more in the business arena......



Maybe he'll even get to run a construction company into the ground like the Shipley?


I agree. Hard to pick the most admirable out of so many achievements. One springs to mind though. “Key worked with a currency trader who mounted a brutal speculative attack on the New Zealand dollar, which entered trading legend for its scale, audacity and profitability. It even prompted Reserve Bank fears that the dollar could collapse”. Such a young man of great moral fibre, not exploitative at all.

No doubt he'll dodge taking any blame for presiding over the expansion of the housing bubble, and denying there was one, should it burst in the coming months/years.


Yet another vacuous statement. As was pointed out below,Forex dealers like Key do nothing socially useful and frequently do things that are socially destructive. Sure,he was smart and made lots of money and that's your base for judging peoples' merits,then yes he was a success. You may recall that he denied that NZ was being used as a tax haven and indeed,wanted to promote the use of trusts here as 'economically beneficial'-until the unfortunate? release of the Panama Papers.
I found Key to be about as trustworthy as Blair. When he became Chair of ANZ,I sold my shares.

I've always raised IRB as an issue. There are very few people with the appropriate knowledge and capabilities for risk assessment. The fact that ANZ's problem has only just been picked up shows they lack the expertise to review and assess compliance. The real risk to the financial system is people with no idea what they are doing over-leveraging a bank and causing a serious failure.

Risk analysis can get quite complex especially when modelling is involved. Yet in many ways it can be less sophisticated than managing derivatives. I wonder if they have another undiscovered problem in that massive pile of derivatives on their balance sheet?

Maybe, ANZ copied the old Australian home team philosophy? -

"As a result of a combination of the “risk-weighted assets” system and the credit crisis, banks have basically withdrawn from the thing they were set up to do: facilitate commerce.

For the big four banks, only 16 per cent, on average, of a real estate mortgage is counted when measuring the bank’s capital ratio. This is rising to 25 per cent next year.

.But every dollar of an unsecured personal and business loans counts against capital and in some cases the risk weighting is 150 per cent.

Capital — that is, the bank owners’ money — has to be 8 per cent of assets, although mostly it’s around 10 per cent. That is, the ratio of owners money to other peoples’ money has to be no greater than 12.5 to 1 and is usually 10 to 1. The result is that for every dollar of capital, the big four banks can choose to lend $62.50 secured against real estate or $10 unsecured. Read more

And even if ANZ didn't - the Value at Risk analysis models are not without risk.

Not without risk, and even the non-IRB approach is still highly leveraged, especially in residential housing as you pointed out. We already have a massive leverage experiment going on with housing already without amplifying the risk (and house prices) further.

With ANZ having to add $760m in capital that more than negates the last OCR cut. As well as the reduction in liquidity in our financial system. I look forward to RBNZ's rapid OCR cut that will follow this event.

hi Dictator. Not sure if you've been watching any DFA but the level of derivatives in the Australian banking system has been rising exponentially. Many stopped reporting the levels in the annual accounts several years ago.... 'Off balance sheet' activities, nothing to see here.

Counterparty risk. Not something to be explained, as we saw last night on TV news 20 sec cursory coverage. All good. Now the weather ....

Something I had another look at last night was a DFA stream from 2 weeks ago. What was pointed out is that derivatives can be used to move risk off-balance sheet. Which from my perspective is that whatever accounting rules they are using do not include downside risk. It's too hard to tell if there is unlimited risk or if they have a synthetic derivative that limits the downside.

With respect to counterparty risk that one is a huge problem. When you have $4 trillion in derivatives (in one bank) and they have risk internationally (with seriously mismanaged EU or US banks) then you have the potential to drag down the global financial system.

Given that we have a couple of banks that cannot even manage to correctly operate IRB we have a very real risk that's concealed from the public and regulators. Although much like in Australia I suspect the regulator here does not have the capacity or capability to scope or calculate the risk. Just hope we don't end up like Greece squared.

Having had a good seat during the GFC one of my conclusions was that for a truly spectacular stuff up the "smartest guys in the room" should have as much lee-way as possible.

So the ANZ shareholders have been given a slap with having to put more capital in and I assume a lesser rate of return on equity as they move to a standardised lending risk analysis. But will the Reserve Bank follow up their words by punishing the Directors? They are the ones that signed false attestations. Along with their paychecks there should be some accountability.

Section 156AC Fine of $200k plus imprisonment of up to 18 months - per director - and a fine of $2m for the bank. Chicken feed - but wont be prosecuted.


Thought the banks were saying they could be trusted and there's no need for RBNZ's capital requirements change? What's this, now? Well I never!

Pity Greypower isn't more financially literate. Now would be the time to recommend their members move their deposits elsewhere. It surprises me that no group has arisen to actively encourage banks to pay more for their deposit borrowings. A bit of activism might make them less complacent, much better than regulation alone. It would seem an appropriate response to Kiwibank's arrogance around cheques too. Stop lending them deposit money for a couple of weeks could really frighten the buggers. Then, when they are more contrite and offer a higher rate, just move it back again.

The question they'll all ask is where? Especially if they need access to the income off the deposits. (Discussion yesterday was that there's too much ticket clipping in the current methods of access to govt bonds, for example.)

Arrogance around cheques. Ha.

Seriously, this has been coming for over 20 years - is it that hard to come into the 21st century?

The bank also doesn't accept instructions by Carrier Pigeon or Morse Code.
And most of them have no where to strap your Horse up outside.
Does Grey Power have a position on that?

Paper based systems are vastly more resilient than computer based ones. Cheques have been around for centuries. What do you do if there is no internet?

Horses are vastly more reliable than these new fangled automobile things. Horses have been around centuries, what do you do if there is no gasoline?

It's 2019. I never thought I'd see a post defending cheques.

Use cash, instead of scribbling out an IOU....?

Bring back yam exchange.

Good to see the Reserve Bank stepping up to the mark and not being intimidated by a previous Prime Minister and now a Director of ANZ (Mr Key), make sure they refill the capital for their operational risk.
Such as the persistent failure in controls and the director attestation process at ANZ as highlighted by the Reserve Bank. Sounds like the sit back and do nothing approach long practiced by the previous National Government.

Also I wouldn't be surprised if ANZ suggested some alternative solutions to the Reserve Bank, such as:-
* Selling it off to Overseas Investors bit by bit.
* Rebranding their logo, so it fits nicely on a flag to be more attractive to Overseas Investors.
* Re-enabling money laundering or better still shadow banking, with no regulation other than there own.
* Hike mortgage interest rates back up so First Time Buyers can't get a foot hold.

RBNZ: So you know you have to model things properly right?
ANZ: Yep we're on it.
RBNZ: You're still not complying...
ANZ: What? Oh we'll do it now.
RBNZ: Still not done...
ANZ: Oh man... give us a sec
RBNZ: You're still not complying
ANZ: Oh we're trying too...

....Another 50 warnings...

RBNZ: Ok that's it.
ANZ: What? We were doing it!!!


This just goes to show that we need to implement the RBNZ's new capital requirements ASAP. The global economy gets riskier by the day, with derivatives portfolios growing to the point where the Australian banks aren't even disclosing their gross notional value. The big four banks are taking the piss holding less than the minimum capital. Reaping huge profits and offloading risk to the NZ taxpayer.

I lost any degree of confidence in banks when i realised that the big four international accountancy firms where being very creative with the banks balance sheets (think European banks) a decade or so ago. I thought, "If they're doing it, who else is doing it?" It's not rocket science from there.

Interesting that this is coming up at this time of potential mortgage stress from dropping home values, Im pleased I no longer have money deposited in ANZ, loyal public deposits will be used to prop this bank up if/when it fails.... and no Govt guarantee on deposits either thanks to John Key, almost as if it was designed.

Well done RBNZ. If a bank is not operating their internal models correctly then absolutely come down hard. I think the RBNZ should have done the same with Westpac as well.

If you cant maintain internal models then you don't deserve the capital benefit of running on them

I haven't said it much recently.. but well done RBNZ.

The share price went down 3 percent today. With the PE ratios of the banks being around the 12s, some might think they are not a bad buy compared to the overall market. But oh, with the housing slide continuing in Australia and most likely the same to come here, there could be a LOT to go on the downside yet.

Have ANZ not gained a financial advantage and should they not face a penalty on the same scale? Look to me like executives have been caught asleep at the wheel. Not inspiring for shareholders.

So the only two possibilities were. 1. ANZ was incompetent in this matter. 2. They did it deliberately to save money. Both are unacceptable and dangerous to their New Zealand customers.
Cancelling their banking licence would solve the problem and would "encourage the rest". Yep, close em up.

I would support a law change so that any bank that brings down our financial system would see charges against the boards and management at the banks.

Any thoughts on how bonus bonds fit into this picture? Don't have any, but know a couple of people that do.

And so they take it out on their investors.