ANZ has been placed on the banking naughty step for potentially lending to New Zealanders without enough capital to protect deposits. How did this happen?
Any journalist will tell you that Friday is a great time to issue an embarrassing press release. Journalists are humans with an eye on the weekend too, so they can miss it when someone ‘throws out the trash’.
And when a particular Friday is the day of the big annual awards ceremony for journalists, it must be very tempting.
So it was that last Friday one of the biggest banking embarrassments we’ve seen in a long time was announced by the Reserve Bank. It stripped the ANZ of the ability to set and manage its own capital reserves, which are needed to ensure it remains a safe place to deposit money. The Reserve Bank referred to a “persistent failure in its controls and attestation process” since 2014.
As dry as Reserve Bank announcements often are, make no mistake: This is a very serious ruling. A censure of this magnitude is not just the naughty step, it’s the banking equivalent of jail time. It indicates the ANZ may have been lending to New Zealanders for five years without sufficient capital to protect its depositors.
To understand the context, since 2008 the Reserve Bank has allowed the ‘Big Four’, ie. ANZ, ASB, BNZ and Westpac, to largely decide for themselves how much capital they set aside. Keeping a buffer of capital ensures they are safe places to deposit money, even in a crisis. No one wants a run on banks. Setting and managing their own capital levels is a rare privilege afforded the Big Four and is supposed to reflect how large, diversified and ‘safe’ they are.
By contrast, the Reserve Bank has required smaller locally owned banks to set aside more capital, and have those levels preset and inflexible. Local banks have long complained that this suppresses their profits and makes it hard to compete with their bigger foreign-owned competitors.
But with a new governor and fresh perspective, the Reserve Bank is now calling for change. It wants all banks to have the same level of capital, which would require the Big Four to raise another $19 billion in shareholders funds over five years. Local banks are already close to the Reserve Bank requirements and would need to raise only another $1 billion between them.
So, in spite of needing less capital and being afforded the privilege of self-managing it, the ANZ has had this licence taken away due to a “persistent weakness in process” for the past five years.
By its own admission the ANZ will now need to stump up over $277m of extra capital to support deposits and lending. The Reserve Bank statement indicates the amount might be significantly more. Either way it’s a very serious mistake, and we need to know why and how it happened.
The explanations offered by the ANZ are cryptic, and ask more questions than they answer. An internal model for calculating its required capital appears to have been approved for use by the Reserve Bank in 2014, but then decommissioned by the ANZ head office in Melbourne, without our Reserve Bank knowing or approving. How did that happen? In the ANZ’s own words:
“A failure of systems and controls, as well as no verification being undertaken by the bank, meant that the ultimate parent bank decommissioned the [Reserve Bank] approved model without the bank ensuring that it had the necessary regulatory approvals in place to move to a new model.”
That reads like bank speak for ANZ’s head office in Australia making an arbitrary decision five years ago, with major implications for its New Zealand subsidiary, which no one here knew about. And it’s no minor administrative oversight. A bank’s internal risk and capital models are at the heart of their risk management. The Reserve Bank censure, the first of its kind, shows the magnitude of the failure.
The irony here is palpable. The big four banks here emphasise how independent they are of their parents in Australia, with independent governance. Their New Zealand branches have vociferously distanced themselves from the widespread malfeasance discovered this year in the Australian Royal Commission on Banking.
Yet, by its own admission, it appears that the ANZ’s Melbourne head office made a decision five years ago, critical to the operation of ANZ New Zealand, that the New Zealand Board and executives remained blithely unaware of. And that may mean its lending in New Zealand was supported by insufficient capital.
And why was this all disclosed on a Friday? And why didn’t David Hiscoe, ANZ’s CEO, front up and disclose a $277m error and Reserve Bank censure, rather than leaving it to a spokesperson? And where are the press releases and explanations on their website, or the NZ Stock Exchange website?
This raises questions about how much independence and control the NZ branches of Australian banks really have. Sir John Key sits as chairman of ANZ New Zealand, yet also sits on the board of ANZ Australia.
We need to know what really happened here, because the ANZ has over 30% of lending in New Zealand. It is, by quite some margin, the most significant company, let alone bank, in New Zealand. What it does and doesn’t do really matters.
There are questions for the Reserve Bank here too. Why wasn’t this picked up in their 2018 survey on bank conduct and culture? In spite of calls for a Royal Commission into banking in New Zealand, the FMA and Reserve Bank were keen to emphasise that their review was comprehensive enough. To its credit, this may have been out of the scope of their inquiry, and the Reserve Bank subsequently asked the ANZ to perform an internal audit of these process. The failure was duly identified by the ANZ, reported and punished. But without the Reserve Bank inquiry who knows how long this may have gone on?
This failure certainly adds weight to the Reserve Bank’s argument that the big four banks should not be trusted to set and manage their own levels of capital.
The ANZ’s actions here need to be picked up, picked apart and lessons learned for our banks and regulators. The Big Four have 88% of lending, oligopoly-like profits and returns of 15%+. It is critical they operate in a world-leading manner, which the ANZ clearly has not.
Sunlight is the best disinfectant, but throwing out a failure of this magnitude in the Friday trash is not the transparency we need or deserve.
Sam Stubbs is the managing director of KiwiSaver provider Simplicity.