The Australian Prudential Regulation Authority (APRA) has increased the capital add-on applied to Australia and New Zealand Banking Group (ANZ) to $750 million in response to heightened concerns about the bank's non-financial risk management practices.
APRA has held longstanding concerns with ANZ's non-financial risk management, and imposed a $500 million operational risk capital add-on to the bank in 2019 to reflect deficiencies in its risk governance.
This capital add-on has remained in place as the bank implemented a remediation program. Despite this program being in place for several years, APRA has yet to observe significant improvements in ANZ's non-financial risk management.
More recently, several issues emerging in the bank's Markets business have increased APRA's concerns. ANZ has admitted that it misreported bond trading data to the Australian Office of Financial Management (AOFM) in 2022-23, and that action has been taken in response to poor behaviour by employees in its Markets business.
While ANZ has launched several investigations into these issues, these issues raise prudential concerns that ANZ has yet to adequately address deficiencies in controls, risk culture, governance and accountability.
In response, APRA will require ANZ to:
- hold an operational risk capital add-on of $750 million, representing an increase of $250 million to the existing add-on;
- appoint an independent party to review the root causes of recent issues and risk governance in the Markets business, and assess the potential impacts across the broader bank; and
- develop a remediation plan to address findings from the independent review.
The capital add-on will remain in place until such time as ANZ has delivered required remediation to APRA's satisfaction.
APRA Chair John Lonsdale said he was concerned at the persistence of risk governance and culture issues within one of Australia's largest banks.
"ANZ is financially sound with strong capital and liquidity levels. However, weaknesses in managing non-financial risk can lead to detrimental financial impacts and APRA has no tolerance for such weaknesses persisting.
"Of the major banks that had capital add-ons applied in 2019, ANZ is the only bank yet to have its add-on either removed or reduced. While the bank has implemented actions to improve its risk governance and culture over the past five years, these recent issues suggest there continues to be material gaps that need to be closed as a priority.
"We have communicated our clear expectations to the ANZ board and executive team that these issues must be urgently reviewed to ensure underlying drivers are identified and addressed. Depending on the outcomes from ANZ's independent review, APRA will consider whether further action is required," Mr Lonsdale said.
