On Friday, an Australian regulatory body announced a significant reduction of AU$500 million in the AU$1 billion ($670.50 million) capital add-on it had imposed on Westpac Banking Corporation (ASX: ASX:WBC) in 2019. This decision comes after the regulator assessed improvements in the bank's risk governance and operational risk management.
Background of the Capital Add-On
In July 2019, the Australian Prudential (LON:PRU) Regulation Authority (APRA) required Westpac, ANZ Group (ASX: ANZ), and National Australia Bank (ASX: NAB) to each set aside an additional AU$500 million. This was to ensure they enhanced their risk management frameworks and reimbursed customers for incorrect fees charged. Later that year, in December 2019, APRA imposed an additional AU$500 million capital add-on specifically on Westpac due to elevated operational risk concerns, primarily stemming from deficiencies in risk governance.
Recent Developments
In mid-March of this year, APRA removed the AU$500 million capital add-on previously imposed on NAB. Following this precedent, the regulator has now decided to reduce Westpac's additional capital requirement by AU$500 million. Westpac indicated that this reduction would enhance its common equity tier 1 (CET1) capital ratio by 18 basis points, strengthening its financial position.
Continuing Oversight
Despite the reduction, the remaining AU$500 million capital add-on will stay in place until Westpac completes its transition work. The regulator emphasized that ongoing improvements in risk governance are essential for the full removal of the capital add-on.
Westpac's Commitment to Improvement
Westpac has been actively working to address the issues identified by the regulator and enhance its risk management practices. The bank's efforts are aimed at not only complying with regulatory requirements but also restoring customer trust and confidence in its operations.