Section 95 - Assessment of ANZ Bank New Zealand Limited's Compliance with the Reserve Bank's capital adequacy requirements
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Section 95 – Assessment of ANZ Bank New Zealand Limited’s Compliance with the Reserve Bank’s
capital adequacy requirements
Section 95 – Assessment of ANZ Bank New Zealand
Limited’s Compliance with the Reserve Bank’s capital
adequacy requirements
Public Summary
15 April 2020
1
Section 95 – Review of ANZ Bank New Zealand Limited
Context
Background
In December 2007 the RBNZ granted accreditation to ANZ NZ and ANZ National Bank which were
subsequently amalgamated into the one entity and brand, ANZ NZ, in 2012. The combined
accreditation allowed both bank brands to use the Internal models for credit and operational risk for
the calculation of regulatory capital adequacy requirements.
As part of its conditions of accreditation, ANZ NZ was required to comply with a number of ongoing
requirements, including obtaining consent from the Reserve Bank of New Zealand (RBNZ) for all
proposed changes to its estimates and models before they are used for regulatory capital purposes.
This requirement has been in force since March 2008 and as part of conditions of registration (1B),
ANZ NZ is required to comply with all requirements contained in the BS2B (RBNZ capital adequacy
framework, internal models based approach).
ANZ NZ informed the RBNZ in April 2019 (and included a note in its disclosure Statement for March
2019, released in May 2019) that in the course of a self-review, ANZ NZ discovered that it had not
been using an approved model for the calculation of the operational risk regulatory capital requirement
since 2014. As a result, ANZ NZ accepted that it was not in compliance with conditions of registration
1B (compliance with the RBNZ BS2B standard).
What we were asked to do
The objectives of the review were to assist the RBNZ to:
Assess the effectiveness of ANZ NZ’s systems for ensuring compliance with the Bank’s capital
adequacy requirements for relevant Parts of BS2B within the terms of reference specified by RBNZ.
Establish ANZ NZ’s current and historical compliance with requirements relating to the use of IRB
and Advanced Measurement Approach (AMA) models to determine its capital requirements.
Understand how governance, structural, resourcing or other organisational factors may have
contributed to the identified compliance issues.
The scope included specific paragraphs from the BS2B Standard (as defined by the RBNZ for this
review) including the requirements pertaining to the use of approved regulatory models for the
purposes of assessing regulatory capital. Any remediation activities by ANZ NZ to address issues or
risks identified in this review were not part of the Deloitte scope.
The focus of this review was, to establish whether ANZ NZ
internal processes supporting compliance with the specific
requirements of BS2B are effective. Further how governance,
structural, resourcing or other organisational factors contributed
to compliance issues.
2Section 95 – Review of ANZ Bank New Zealand Limited
Assessment Summary
Current Areas of non-compliance
As a result of the Section 95 capital review performed on ANZ NZ a number of instances of current
non-compliance with BS2B requirements were identified relating to use of unapproved models and
maintenance of a model compendium. Specifically, these were:
BS2B Section Requirement Observation
1.3A Banks to only use 17 out of 33 Wholesale credit models in use
approved internal models were not approved by the RBNZ (reported by
for the calculation of their ANZ NZ in September 2019 Disclosure
regulatory capital Statement)1
Operational Risk Capital model approach in use
not approved by the RBNZ (reported by ANZ
NZ in March 2019 Disclosure Statement)
A minor portfolio (EAD 45.9m) treated as
Standardised without RBNZ approval.
1.3B A Bank that has been ANZ NZ model Compendium:
accredited to use the IRB - contained unapproved models
approach must maintain a - contained inaccurate representation of the
compendium of approved Operational Risk model in use
models with the RBNZ - was not updated as model changes
occurred.
It should be noted that these current non-compliance issues occurred historically (prior to 2013 for
Credit Risk models and 2014 for the Operational Risk model), however most were not identified until
recently (i.e. Operational Risk) and as result of the Section 95 review.
Historical Areas of non-compliance
The terms of reference required a historical assessment of compliance with the BS2B requirements in
the scope of this Section 95 review. The following instances of historical non-compliance were also
identified:
BS2B Section Requirement Observation
Part 1.3A (a) Changes to model 3 out of 19 changes to Retail models (credit
structures, estimates or card models (PD, LGD and EAD) since
judgement require RBNZ accreditation were not approved by the RBNZ
approval prior to implementation.
15 out of 35 changes to Wholesale models
since accreditation were not approved by the
RBNZ prior to implementation
Part 8 – Scenario analysis should Whilst the Advanced Operational Risk Capital
Operational be used to help assess model was decommissioned in 2014, prior to
Risk the impact of deviations this there was no evidence that scenario
paragraph from the correlation analysis was used for back testing of the
assumptions that are model.
8.29
embedded in the
registered bank’s
operational risk
measurement system.
1
The ANZ NZ Disclosure Statement, September 2019, states that “applying the last RBNZ approved methodologies to the affected
exposures as at September 30, 2019 would decrease RWA by NZ $47 million (0.05%) in aggregate, which is not sufficient to
affect reported capital ratios.”
3Section 95 – Review of ANZ Bank New Zealand Limited
Areas of risk/improvement
Whilst not instances of non-compliance, within the scope of the review the following risks were also
identified:
Requirement Observation/Risk
Periodic changes (eg Whilst no compositional changes were identified, ANZ NZ did not
compositional changes have a documented process to identify, assess and notify these
to the loan book) changes
should be notified to
the RBNZ
Changes to model ANZ NZ follow the submission requirements in line with RBNZ
structures, estimates guidance consistently. However, we noted instances where only
or judgement require incremental model changes were advised to the RBNZ for
RBNZ approval approval even though the entire model was not previously
approved. This increases the risk of unapproved models.
Residential mortgage Whilst ANZ NZ follow requirements of the standard, the process
loan valuation process for confirming and maintaining a list of approved valuers is not
documented.
Documentation of Whilst models were found to be appropriately documented, in some
rating system design cases the model documentation needs to be updated where there
are references to superseded systems (relating to the model
system platform).
Corporate Model changes are approved through ANZ Global Group
Governance Committees with ANZ NZ representation, however the Group
committees do not specifically document ANZ NZ ability to reject
changes impacting on the NZ portfolio.
Credit Risk Control The rating system has been subject to independent review on an
annual basis by Group and NZ Internal Audit teams. However,
the level of detailed reviews did not identify existing compliance
issues (i.e. model compendium).
Qualitative Operational Risk policies are Group maintained and owned.
Operational Risk – Whilst no instances of changes occurring without ANZ NZ
independent function approval were identified, ANZ NZ do not have documented ability
to reject changes impacting on the NZ portfolio.
Group policies do not consistently reflect BS2B requirements, in
some cases only APRA requirements are documented.
Operational Risk Reviews of the Operational Risk Model and documentation
Independent review conducted by ANZ Group with no reference to BS2B
requirements, only APRA requirements stated. Whilst RBNZ and
APRA requirements are the same, divergence could pose a risk.
4Section 95 – Review of ANZ Bank New Zealand Limited
Effectiveness of ANZ NZ’s systems for ensuring compliance and assessment how
governance, structural, resourcing or other organisation issues contributed to the
identified compliance issues.
The current non-compliance, in terms of the use of unapproved models (Credit and Operational
Risk), stem from a number of reasons indicating there was not sufficient rigour historically around
these processes. Whilst historical documentation is unclear as to exactly how and why these
instances of non-compliance came about, the contributing factors were:
- Incorrect assumptions post accreditation on the model approval status
- Incorrect assumption on interpretation of RBNZ approval change requirements at the time (eg
the change made to operational risk model was assumed not to require approval given the
existence of a regulatory capital floor).
- Lack of a comprehensive compliance plan covering operational and credit risk capital models
approvals with appropriate accountabilities for compliance
These issues were subsequently not identified due to:
- An historical culture of acceptance of legacy assumptions on models implemented at
accreditation
- Lack of NZ specific model change log/register managed by ANZ NZ
- Insufficient assurance activities established to monitor compliance
In addition, it is noted that ANZ NZ rely upon ANZ (parent) Group for some global processes and
procedures and for the development and validation of models. The approval committees for these
changes and activities are ANZ Group level committees, with ANZ NZ senior management as
permanent members. Whilst there is evidence that ANZ NZ are actively involved in decisions and
changes where there is impact on the New Zealand portfolio and no issues of non-compliance have
been raised, risks exist pertaining to maintenance of compliance as ANZ NZ accountabilities and
responsibilities in these committees are not formally articulated.
5Section 95 – Review of ANZ Bank New Zealand Limited
Notes and disclaimers
Scope limitations
The work we have undertaken does not constitute a forensic investigation or assessment to identify,
search for or quantify breaches or wrongdoing, nor does it express a conclusion about whether such
actions are proper or legal. The review is not designed to examine all actual or potential breaches or
issues the review is aware of or becomes aware of.
We provide no assurances that the information supplied is either complete or correct and accept no
accountability or responsibility for the information supplied. The assumptions used within this report
are based on the Reserve Bank of New Zealand Act 1989 and regulations in force in New Zealand at
the time of writing and the observations have been provided following all reasonable engagement
with senior officers of ANZ NZ concerned and the representations made and information supplied by
these officers in response to our requests.
Professional standards
As a member of the New Zealand Institute of Chartered Accountants, all work performed by Deloitte
is subject to the Accounting Professional and Ethical Standards, which include requirements in the
areas of ethics, independence, documenting the terms of the engagement, and quality control.
The procedures that we have performed do not constitute an assurance engagement in accordance
with New Zealand Standards for Assurance Engagements, nor do they represent any form of audit
under New Zealand Standards on Auditing, and consequently, no assurance conclusion or audit
opinion has been provided.
General Distribution Disclaimer
Our report is provided solely for ANZ NZ and the RBNZ’s exclusive use. We accept or assume no
duty, responsibility or liability to any other party in connection with the report or this engagement,
including without limitation, liability for negligence in relation to the findings and recommendations
expressed or implied in this report.
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