NAB gets regulator’s nod to resume risk modelling

National Australia Bank (NAB) has received approval from the Australian Prudential Regulation Authority (Apra) to resume use of its internal model for the calculation of the market risk component of risk-weighted assets, the bank said in a statement issued on December 13.

Effective as of 1 January 2007, the approval comes almost exactly three years after a forex options trading scandal that cost the bank A$360 million ($282 million) and forced the resignation of nearly a dozen senior bank executives.

In the last three months of 2003, four traders in the bank had reportedly taken leveraged call options positions on the Australian and New Zealand dollars with the expectation that these currencies would depreciate against the US dollar. But instead of weakening, the currencies both appreciated sharply against the greenback, resulting in heavy losses. Taking advantage of loopholes and weaknesses in the bank's system, the traders also reportedly entered fictitious currency transactions into the books to cover their losses.

Apra also removed the regulatory requirement to maintain a capital target of 10%, effective immediately, the December statement said. However, this would have no impact on NAB’s capital planning for this financial year, which assumed a return to the internal model during the first half of its 2006/07 financial year, ending September 30 2006. The bank indicated in a profit announcement issued on December 1 that, had the internal model been applied at September 30, risk-weighted assets would have been reduced by about A$9.9 billion on a pro-forma basis.

NAB is Australia’s largest lender and the owner of two banks in Britain - the Yorkshire and the Clydesdale. Three traders in Melbourne and one in London received jail sentences of 15-30 months, in trials which concluded in mid-2006.

NAB announced a 10% increase in net profit to A$4.39 billion for the year ending September 30. “This result follows two and a half years of detailed planning, hard work and careful implementation,” John Stewart, chief executive officer, said in the results statement issued in November. “We have faced the issues that confronted [us] in 2004, and are fundamentally changing our culture and the way we run the business.”