The Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.
BNZ identified a number of errors while undertaking a programme of remediation, which began in early 2018 and is expected to continue into 2020. These included three capital calculation errors, which resulted in misreported risk weighted assets over a number of years.
It is now required to increase the risk weight floor of its operational risk capital model from $350 million to $600 million capital. The $250m increase is a supervisory capital overlay.
The Reserve Bank requires banks to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. BNZ has not been in breach of minimum capital requirements at any point.
“However given the likelihood that further compliance issues will be discovered during the review and remediation, the Reserve Bank regards a precautionary capital adjustment as prudent,” Deputy Governor Geoff Bascand says.
In 2017, the Reserve Bank conducted a review of bank director attestation processes and noted that many banks were attesting to compliance on the basis of negative assurance, ie they did not have evidence to suggest that they were not in compliance.
Breaches are now being identified as banks review their governance, control and assurance processes and move from a negative assurance to a positive evidence-based assurance framework. Over the past year, a number of banks have disclosed breaches of their conditions of registration, Mr Bascand says. Many of these have related to errors in the calculation of their regulatory capital or liquidity which, in some cases, have gone undetected for a number of years.
“We are reassured by BNZ’s response to the issues along with the independent oversight from PWC,” Mr Bascand says. “BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses.
“The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank’s expectation that the current review will identify all outstanding compliance issues and potential breaches.”