Commonwealth Bank hit by A$1bn op risk add-on

Capital charge applied for poor management of operational, compliance and conduct risks

The Commonwealth Bank of Australia has been slapped with a A$1 billion ($744 million) add-on to its operational risk capital requirement, following the conclusion of an inquiry into its governance, culture and accountability by the Australian Prudential Regulation Authority on May 1.

The adjustment to the CBA’s op risk regulatory buffer, equivalent to a A$12.5 billion increase in its risk-weighted assets, is effective from April 30 – the date on which the bank entered into an “enforceable undertaking” with Apra. The CBA will be allowed to apply for the removal of the adjustment only on meeting certain conditions.

As a result of the action, the CBA’s common equity Tier 1 (CET1) capital ratio dropped 27 basis points to 9.8% at the end of March.

Excluding the add-on, operational risk-weighted assets were largely unchanged in the first three months of the year, compared with the previous quarter, at A$41 billion.

Who said what

“CBA has given to Apra an enforceable undertaking, which establishes a framework by which CBA will demonstrate it is addressing the full set of recommendations made by the panel in a timely manner. Until such times as these recommendations are addressed to Apra’s satisfaction, an add-on to CBA’s operational risk capital requirement will continue to apply” – Prudential Inquiry into the Commonwealth Bank of Australia (CBA) Final Report, Apra, April 30. 

What is it?

Apra launched an inquiry into the CBA in August 2017, following several incidents that damaged the reputation and public standing of the bank. The damning report published last week found a “complex interplay of organisational and cultural factors at work”, and “CBA’s continued financial success dulled the institution’s senses to signals that might have otherwise alerted the board and senior executives to a deterioration in CBA’s risk profile”.

The report concluded “this dulling was particularly apparent in CBA’s management of non-financial risks; i.e. its operational, compliance and conduct risks” – hence the add-on to its regulatory capital.

Why it matters

The levy imposed by Apra is adding pressure to the CBA’s capital ratios, which have been on a downward trend since September 2017, and its CET1 measure is now far below the 10.5% “unquestionably strong” threshold set by the regulator in June 2017.

Even before accounting for the regulatory add-ons, the bank’s CET1 capital ratio had already declined 30bp quarter-on-quarter, pushed down by higher RWAs. The additional capital requirements could weigh down the Australian lender for months to come too, as Apra did not specify an end date to the penalty. To reach the 10.5% level by Apra’s deadline of January 2020, it is looking ever more likely the CBA will have to take drastic action.

Get in touch

Can the CBA make a quick comeback from this reversal and get itself back into Apra’s good books? Let us know your thoughts. You can contact me at [e-mail] or @aimoneale and @RiskQuantum.

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