APRA forces Westpac to lift risk capital by $500m as investigation begins

APRA forces Westpac to lift risk capital by $500m as investigation begins

Regulators are not about to show Westpac (ASX: WBC) any mercy in the lead up to Christmas with the bank now facing another investigation relating to an alleged breach of anti-money laundering laws.

Last month AUSTRAC alleged Westpac contravened the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) on more than 23 million occasions, and failed its due diligence on transactions with potential child exploitation risks.

The scandal triggered resignations from the bank's CEO and chairman, and led DBRS Morningstar to downgrade its long-term trend rating for Westpac citing "serious shortcomings in operational risk".

Now Westpac will face a new challenge after the Australian Prudential Regulation Authority (APRA) announced today it would be investigating possible breaches of the Banking Act 1959.

APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank's actions to rectify and remediate the issues after they were identified.

The authority will also look into whether Westpac, its directors or senior managers breached the Banking Executive Accountability Regime (BEAR) or contravened APRA's prudential standards. A review program will also be undertaken focused on risk governance, covering risk management, accountability, remuneration and culture. 

Due to the bank's heightened operational risk profile, APRA will impose an immediate $500 million increase in Westpac's capital requirements.

This takes the total operational risk capital add-ons that Westpac is required to hold to $1 billion, following the increase announced by APRA in July 2019.

The bank has however taken steps to boost its capital ratio buffer, including a $2.5 billion capital raising that took place in November before the AUSTRAC investigation came to the fore. 

The additional $500 million operational risk capital requirement, which will be implemented through an increase in risk-weighted assets, will apply from 31 December 2019.

Westpac expects the change will reduce Westpac's Level 2, common equity tier 1 (CET1) capital ratio by approximately 16 basis points based on its balance sheet as at 30 September 2019.

"AUSTRAC's statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia's second largest bank," says APRA deputy chair John Lonsdale.

"While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed.

"Given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred, this will necessarily be an extensive and potentially lengthy investigation."

Westpac has acknowledged the announcement and emphasised its commitment to cooperating with APRA in all aspects of its investigation and review.

"Westpac accepts the gravity of the issues presented by AUSTRAC," says Westpac chairman Lindsay Maxsted.

"As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards.

"We will provide our full support to APRA through its investigation and review."

The bank also noted it had appointed IBM subsidiary Promontory Financial Group to undertake an Accountability and Financial Crime Program Review, which is currently underway.

WBC shares were down 1.09 per cent at $24.58 at 11:25am AEDT.

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