APRA slams Macquarie, Rabobank and HSBC over funding standards

APRA slams Macquarie, Rabobank and HSBC over funding standards

The Australian Prudential Regulation Authority (APRA) has found the intra-group funding practices of three major banking institutions could undermine their stability in times of crisis.

Following a review of funding agreements across the authorised deposit-taking (ADI) industry, APRA has called out Macquarie Bank (ASX: MQG), Rabobank Australia and HSBC Bank Australia over breaches of the prudential liquidity standard.

APRA's review found the banks' provisions for funding agreements would potentially allow for group funding to be withdrawn in stress scenarios.

As a result they were deemed to be improperly reporting the stability of internal funding between different divisions and areas of the business.

"Macquarie Bank, Rabobank Australia and HSBC Australia are financially sound, with strong liquidity and funding positions in the current stable environment," says APRA Deputy Chair John Lonsdale.

"However, to ensure they would be able to withstand a scenario of financial stress, group funding agreements for Australian banks must be watertight, so they can be relied on when they would be most needed."

APRA will require these banks to strengthen their intra-group agreements so that term funding cannot be withdrawn in financial stress scenarios. 

The regulator also requires the banks to restate their past funding and liquidty ratios where they had been reported incorrectly, in order to provide transparency to investors and the broader communities.

APRA also notes supervisors are considering a range of further options, including the imposition of higher funding and liquidity requirements on these ADIs.

In response to APRA's announcement, Macquarie highlighted it had removed a material adverse change (MAC) clause in the master loan between Macquarie Group Limited (MGL) and Macquarie Bank Limited (MBL).

The bank claims this move means there will be no impact on MBL's liquidity coverage ratio (LCR).

"It is likely that MBL's recalculated LCRs will show a historical non-compliance with APRA LCR requirements," the company said.

"Had MGL and MBL been aware of APRA's interpretation of the MAC clause, they would have removed the clause earlier to ensure the funding counted toward MBL's LCR.

"On a pro forma basis following the removal of the MAC clause, and thereby reflecting current arrangements, MBL's average LCR for the June 2019 quarter stood at 166% and for all prior quarters would have been as reported at the time."

The group clarified MGL raises long-term funding and places surplus funds with MBL, in the form of intra-group loans. Over the past year, these loans have represented around 10-15 per cent of MBL's total funding.

Rabobank Australia has also clarified its issues relate to a particular clause in internal funding arrangements, noting its working with APRA to address concerns.

"As noted by APRA, Rabobank Australia is financially sound and has a strong liquidity and funding position," says Rabobank Australia CEO Peter Knoblanche.

"This matter relates to a type of clause contained within the funding agreement with our parent which APRA has recently clarified has implications on the way liquidity coverage ratios are calculated and reported.  We are working with APRA to ensure this agreement is amended appropriately."

Rabobank managing board member Berry Marttin says the Dutch company stands behind its ongoing commitment to its Australian subsidiary, and the funding agreement is intended to reflect this complete commitment.

"Rabobank globally is among the most solid and creditworthy banks in the world, while Rabobank Australia Limited in its own right is a financially strong, stand-alone business, with a proven record of many years of healthy performance and sustained growth," says Marttin, who is responsible for the bank's international rural and retail business.

Marttin says Rabobank Australia isa successful growing business and a core part of the company's growing international agricultural banking operation.

He adds both Rabobank globally and the Australian subsidiary are "rock solid financial institutions with extremely strong liquidity positions".

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