Structural complexities a ‘noxious weed’ in banking

In an address to the AFR Banking & Wealth Summit on Wednesday (27 March), the chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres, noted the “significant organisational and cultural deficiencies” in the banking sector.

Mr Byres made reference to APRA’s prudential inquiry into the Commonwealth Bank of Australia (CBA), which he said provided the regulator with insight into organisational risks in institutions across the financial sector and in the market more broadly.

“[The prudential inquiry] was an expensive and resource intensive exercise, but the results were highly valuable, not just for CBA, but for all institutions. Indeed, its impact has stretched well beyond the financial sector, and well beyond Australian shores,” Mr Byres said.

“Importantly, it illustrated how individual areas of weakness – each of which may not be particularly problematic on its own – can combine and compound one another to create a broader structural weakness in organisational and cultural resilience.”

The APRA chair said that the “multifaceted nature” of such risks requires a “multifaceted solution”, acknowledging that there is no “silver bullet”.

Mr Byres reported that following the inquiry into CBA, APRA asked 36 of Australia’s largest institutions to conduct a self-assessment against the key findings of the inquiry into CBA.

According to the APRA chair, most organisations acknowledged a number of the issues outlined in the CBA report were present in their own organisations, with structural complexity cited by Mr Byres as a notable example of the shared risks to organisational and cultural resilience of the institutions.

Mr Byres noted that several lenders, including the big four banks, have sought to simplify their business structures over the past few years, but described structural complexities as a “noxious weed” that must be addressed at its “root cause”.  

“Complexity seems akin to a noxious weed that has spread across the industry,” he said. “There are many simplification programs currently underway, but unless the root cause of the complexity is tackled – the circumstances that allowed it to take hold in the first place – then what comfort do we have that it will not grow back to strangle businesses again?”

Also addressing the AFR Banking & Wealth Summit, Anna Bligh, CEO of the Australian Banking Association, claimed that the banking institutions have been proactive in their moves to focus on “core services”.

“We’ve seen businesses sold, businesses demerged, with potentially more to come,” she said. “Without a single recommendation about vertical integration, banks are rethinking their businesses and reverting to their core service, to what they know best.”

Further, Mr Byres outlined other risks identified by institutions in their self-assessments, which he said would help form the basis of APRA’s future regulatory work, which would include:

• Incentives – in particular, work on executive remuneration designed to better align potential rewards with a holistic view of performance (capturing the “how” as well as the “how much”)
• Assurance and compliance mechanisms – the introduction of stronger and more effective compliance and assurance mechanisms
• Accountability and consequences – clearer and sharper accountabilities to ensure there can be appropriate consequences for poor outcomes
• Governance and risk oversight – a stronger system of governance and risk oversight

“Together, these components of our work program will ideally help to reinforce a sound foundation of organisational and cultural resilience,” Mr Byres said.

“But as I have said previously, regulators can’t regulate good culture into existence.”

He concluded: “We can help lay the platform, but ultimately it will be boards and executives that do the heavy lifting.”

[Related: APRA clamping down on P2P lending models]