The Reserve Bank has revoked ANZ Bank New Zealand Limited’s (ANZ) accreditation to model its own operational risk capital requirement due to a persistent failure in its controls and attestation process.
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 requires banks to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.
“Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management,” says Deputy Governor Geoff Bascand.
“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.
“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.”
The Reserve Bank had encouraged ANZ to undertake a full review of its attestation process, and assess its compliance with capital regulations, Mr Bascand says. 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.”
ANZ is one of four big banks in New Zealand that are accredited by the Reserve Bank to use their own risk models – the internal models approach – in calculating their regulatory capital requirements.
The Reserve Bank is currently consulting on its capital framework for banks. Among the many decisions to be made, and in part due to proven weaknesses with the internal models approach, it is proposing that all banks adopt a new standardised approach for calculating operational risk capital.
