APRA Halves CBA Operational Risk Capital Add-on

According to the latest release, Australian Prudential Regulation Authority (APRA) has halved the AUD 1 billion capital add-on applied to Commonwealth Bank of Australia(CBA ), in light of the bank's progress in addressing concerns over its governance, accountability and risk culture frameworks and practices.

CBA has made "significant progress" in areas such as risk management and compliance, remuneration and risk culture, APRA says.

Background

The capital add-on was imposed on CBA in May 2018 as part of APRA's response to a prudential inquiry into the bank. The inquiry's Final Report highlighted widespread complacency, an inadequate risk management framework, unclear executive level accountabilities, and an under-resourced compliance function, among other issues, and offered recommendations to address CBA's failings.

At the time, CBA gave APRA an Enforceable Undertaking, committing to addressing the regulator's findings, and APRA imposed a AUD 1 billion add-on to CBA's operational risk capital requirement. Under the terms of the EU, a Remedial Action Plan (RAP) was provided to APRA for approval, and CBA appointed an Independent Reviewer to report quarterly progress against the RAP.

On Friday (20 November), APRA said in a statement that "The latest quarterly report from the Independent Reviewer indicated that CBA has made significant progress in executing the RAP.

Recent work by APRA to validate CBA's progress against the RAP, in areas such as risk management and compliance, remuneration and risk culture, supports that assessment, although a substantial body of work is needed to ensure the improvements are fully embedded across the whole CBA Group.”

In recognition of the work undertaken by CBA to date, APRA has reduced the add-on to its operational risk capital requirement to AUD 500 million, effective immediately.

The remaining AUD 500 million capital add-on will remain in place until CBA finalises all of the matters covered by the RAP, addresses all the Final Report recommendations, and APRA undertakes further validation work to assess the sustainability of the banks improvements.

APRA added, "We welcome APRA's acknowledgment of the progress we have made over the past two years," CBA chief Matt Comyn said in a statement. "At the same time, we and APRA recognise there is still a substantial amount of work to do before our Remedial Action Plan is fully implemented and embedded across CBA.

We remain committed to achieving these outcomes and to ensuring the improvements to strengthen governance, accountability and risk culture frameworks, practices and outcomes are sustained."