NAB releases Apra report

National Australia Bank has unexpectedly released in full a report by Australia’s banking regulator, the Australian Prudential Regulation Authority (Apra), on the A$360 million options trading debacle.

The report, released yesterday, mirrors many of the findings in the report published by PricewaterhouseCoopers (PwC) two weeks ago, and points to a failure of the bank’s internal controls “at every level”. In particular, the report highlights complacent and unquestioning line managers for failing to heed warning signals emitted by the bank’s market risk management system.

Like the PwC report, Apra highlights the role played in the scandal by culture and governance within the bank, and in particular, a dismissive approach towards risk management by the front office in favour of a “profit is king” mantra. The regulator also points to a “regimented” corporate culture across the bank that hindered transparency and discouraged the escalation of problems to the board.

Also identified are gaps in back-office validation procedures, the absence of formal policies for dealing with limit breaches, and a lack of clarity around who has the authority to enforce risk reductions. Apra puts much of the blame for these failures on the NAB board, which is says was “not sufficiently pro-active on risk issues”.

The regulator makes a number of recommendations in the report, including the development of appropriate escalation channels to the board and more transparent risk reporting systems. The bank has been told to review all back-office confirmation and reconciliation procedures, while the board has been instructed to review and formally approve a revised set of market risk limits across the markets division by April 30.

However, Apra has also imposed a number of tough regulatory sanctions on the bank. Most severe is an order for NAB to increase its capital adequacy ratio to 10%, “until such time Apra is satisfied that all material weaknesses identified in this report have been rectified”. The bank’s capital adequacy ratio as of September last year was 9.7%, with regulatory capital totalling A$24.5 billion against total risk-weighted assets of A$252.4 billion.

Apra has also withdrawn approval for NAB to use its own internal models for calculating market risk regulatory capital, in part because of the lack of accuracy of the bank’s VAR calculations for the currency options book. Instead, the bank has to use the standard methodology set by the regulator, which lays out pre-specified rules for determining market risk exposure. Finally, the bank is not allowed to conduct currency options business with corporate customers or proprietary trading until the new limits have been approved and the bank has addressed the issues outlined in the report.