Westpac breaches registration conditions

Westpac has admitted to breaching conditions of its banking registration in its quarterly disclosure document. Photo/Richard Robinson.

Westpac bank has admitted breaching a condition of its registration relating to how it measures capital adequacy and has been told to get an independent review by the Reserve Bank.

The non-compliance was revealed yesterday in the bank's quarterly disclosure statement.

In it the bank said it had identified that since 2008 it had wrongly classified local government exposures as sovereign exposures instead of bank exposures.

It also admitted to operating versions of five separate capital models without gaining prior approval from the Reserve Bank - a requirement that was put in place in July 2014 as part of the Reserve Bank's revision of capital adequacy frameworks.

Westpac also found it had changed the way it classified small to medium sized retail and corporate asset definitions without prior approval.

"Consequently, the Reserve Bank has advised that the Bank's compliance with advanced internal rating-based aspects of BS2B is to be independently reviewed."

The review would be conducted under section 95 of the Reserve Bank Act.

The maximum fine for breaching section 95 is $2 million.

Westpac estimates the changes it implemented resulted in an increase of risk weighted assets in excess of $1 billion.

A Westpac spokesman said it would full engage in the review with the Reserve Bank and there was never any suggestion the bank did not have appropriate capital.

"The changes to our models resulted in us holding more capital and there was never any suggestion that the bank did not have appropriate capital."

Massey University banking expert David Tripe said consumers should not be worried about the breach because Westpac had a good level of capital.

But he said it raised concerns the bank's processes.

"The question is, is this a particular problem at Westpac or is Westpac the particular bank that has identified it so far and the others haven't."

Only the four big banks - Westpac, ANZ, BNZ and ASB - use the same internal models based approach.

Tripe said the issue suggested to him that what is likely to have happened was a turnover in personel that has resulted in this particular point of detail not being followed up on.

"The question it raises in my mind is around their procedure for handover - has it gone astray and why has it gone astray.

He said Westpac was not the first bank to breach its registration conditions but it was the first time he had heard of this sort of breach.

A spokeswoman for the Reserve Bank said it would not be providing any additional comment on Westpac's disclosure statement.