Westpac New Zealand Limited (Westpac) has retained its accreditation as an internal models bank following completion of an extensive remediation process required by the Reserve Bank.
In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations. The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.
The Reserve Bank imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the failures or risk losing its accreditation as an internal models bank.
Deputy Governor Geoff Bascand says that following the remediation process, Westpac is now operating with peer-leading processes, capabilities and risk models in a number of areas.
“Westpac has taken the findings of the independent review as an opportunity to make meaningful improvements to its risk management, and we commend it for its co-operative and constructive engagement in working with Reserve Bank over the remediation period.
“The changes that Westpac has made to its internal processes, governance and resourcing, as well as a suite of new credit risk models for which it has sought approval, have given us confidence in its capital modelling and compliance and satisfied us that it now meets the internal models bank standard.
“Looking forward, we will continue to hold all internal model banks to the same high standards.”
Internal models banks are accredited by the Reserve Bank to use approved models to calculate their regulatory capital requirements. Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management.
Banks are required to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.
The Reserve Bank will amend Westpac’s conditions of registration from 31 December to remove the two percentage point overlay applying to its minimum capital requirements.
As a condition of retaining its accreditation Westpac will need to satisfy several ongoing requirements, which it has committed to resolving, Mr Bascand says.