RBNZ Orders Westpac to Hold More Liquid Assets After Breach

New Zealand’s central bank is requiring Westpac Banking Corp.’s local unit to hold more liquid assets while it sorts out problems with risk governance processes.

Westpac NZ was found to be in breach of the requirements of the Reserve Bank’s liquidity policy over a period from 2012 to 2020, the RBNZ said in a statement Wednesday in Wellington. It has instructed the lender to commission two independent reports to address the concerns.

“We have experienced ongoing compliance issues with Westpac NZ over recent years, most recently involving material failures to report liquidity correctly, in line with the Reserve Bank’s liquidity requirements,” Deputy Governor Geoff Bascand said. Westpac NZ “needs to take a close look at its risk governance practices,” he said.

In December, the Australian Prudential Regulation Authority took enforcement action against parent company Westpac Bank in response to material breaches of prudential standards on liquidity, and ordered similar remedies. The regulator said while the breaches had been rectified, they demonstrated weaknesses in risk management and oversight.

The RBNZ said Westpac NZ failed to correctly calculate its so-called mismatch ratio, which is a measure of a bank’s liquid assets, adjusted for expected cash inflows and outflows to mitigate risk during a period of stress. The calculations have since been corrected and Westpac has progressed a program of remediation to address the root causes of the non-compliance, it said.

One independent report will assess risk governance processes and practices applied by the board and executive management, the RBNZ said. The other report needs to provide assurance that the actions taken to improve the management of liquidity risks, and the culture surrounding it, are effective.

The RBNZ is increasing the required holding of liquid assets -- which are cash or assets that can be easily concerted to cash -- until it is “satisfied that Westpac NZ’s remediation work is complete and effective,” the central bank said.

In a statement, Westpac NZ said it has taken a number of steps to improve risk governance but recognizes more work is required and supports the additional oversight that the independent reports will provide.

“Westpac NZ acknowledges the importance of liquidity and risk governance obligations and will support the independent reviewers to provide the necessary reports to the Reserve Bank,” it said. “Westpac NZ will also act promptly on any recommendations from the reviews.”

The RBNZ said it remains confident that Westpac’s current liquidity and funding positions are sound, and that the bank is well- capitalized.

“The reviews outlined today are to ensure this remains the situation on an ongoing basis,” it said.

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