By Byron Kaye and Roushni Nair
(Reuters) – Australia’s banking regulator on Friday increased the amount of reserve money that No. 3 lender ANZ must keep on hand due to suspected widespread misconduct at its bond trading unit, the first financial fallout from the growing scandal.
The Australian Prudential Regulation Authority (APRA) should have reviewed a A$500 million ($335 million) capital surcharge it imposed on ANZ and other major lenders in 2019 in a crackdown on industry misconduct, but instead increased the requirement from ANZ by A$250. million, citing concerns about risk culture.
The regulator has also ordered Australia’s seventh-largest listed company to hire an outside party to investigate the causes of the problems at its bond trading division, in addition to investigations already underway by the bank and the securities regulator.
The APRA order is the first tangible impact on the bank since media reports in May said the bank’s traders had misreported the value of a 2023 government bond trade. ANZ has since said it has dismissed and suspended traders and launched a multi-pronged investigation into market-related activities and staff conduct.
“ANZ is financially sound with strong capital and liquidity levels, but weaknesses in the management of non-financial risks could lead to damaging financial consequences and APRA will not tolerate such weaknesses continuing,” APRA chairman John Lonsdale said in a statement.
The regulator had told ANZ’s board and executive team that it wanted to address the root causes of the problem, and “depending on the outcomes of ANZ’s independent review, APRA will consider whether further action is necessary,” Lonsdale added.
ANZ said in a statement that it recognized APRA’s concerns and was accelerating work already underway to address the issues. The bank was working with the regulator on the scope of the independent investigation, the bank added.
ANZ shares were 2.3% lower in late trading on Friday, against a flat overall market and negligible changes in the other Big Four banking stocks, Commonwealth Bank, Westpac and National Australia Bank (OTC:).
Although ANZ, which recently completed a A$5 billion purchase of insurer Suncorp’s bank, this month reported financial results in line with peers, analysts said the APRA move set the course for a governance overhaul which can last years.
“The key risk we are concerned about is that ANZ will have to provide an enforceable undertaking to APRA to resolve issues with controls, risk culture, governance and accountability,” E&P analyst Azib Khan said.
Rival Westpac was distracted for four years by an APRA risk management intervention in 2020, and “we see the risk of similar operational underperformance for ANZ over several years”, he added.
($1 = 1.4912 Australian dollars)
