APRA calls out banks for ‘improper reporting’

Following a review of funding agreements across the ADI sector, the Australian Prudential Regulation Authority (APRA) has found that Macquarie Bank, Rabobank Australia and HSBC Bank Australia are in breach of the regulator’s standards for the reporting of intra-group funding arrangements.

According to APRA, the banks were “improperly reporting” the stability of the funding they received from other entities within their respective groups, adding that the lenders had provisions in their funding agreements that would potentially allow the group funding to be withdrawn in a stress scenario, which it said undermined their stability.

As a result, APRA will require the banks to strengthen intra-group agreements to ensure term funding cannot be withdrawn in a financial stress scenario.

The regulator will also require the banks to restate their past funding and liquidity ratios where these had been reported incorrectly, to provide transparency to investors and the broader community.

APRA noted that it would also consider imposing higher funding and liquidity requirements on the three banks.

Following the announcement, APRA deputy chair John Lonsdale said: “Macquarie Bank, Rabobank Australia and HSBC Australia are financially sound, with strong liquidity and funding positions in the current stable environment.

“However, to ensure they would be able to withstand a scenario of financial stress, group funding agreements for Australian banks must be watertight, so they can be relied on when they would be most needed.” 

Macquarie, Rabobank and HSBC have already made moved to realign their intra-group funding arrangements with APRA’s prudential standard.

In Macquarie’s case, the group has raised long-term funding and placed surplus funds, in the form of intra-group loans, with its banking division.

According to Macquarie, over the past year, the intra-group loans have represented around 10-15 per cent of Macquarie Bank’s total funding and have been included in the calculation of the bank’s liquidity coverage ratio (LCR), as per their contractual tenor.

The funds were documented under a “master loan agreement”, in place since 2007, which included a material adverse change (MAC) clause, which APRA has said could be accelerated and thereby fall short of the LCR horizon of 30 days.

In accordance with APRA’s guidance, Macquarie has removed the MAC clause to restore the contractual tenor of the loans and ensure there will be no impact on Macquarie Bank’s LCR calculation.

Macquarie stated that it would restate its historical LCR dating back to 1 July 2017 to reflect APRA’s interpretation of the MAC clause.

“It is likely that MBL’s recalculated LCRs will show a historical non-compliance with APRA LCR requirements,” the group stated.

“Had [Macquarie Group] and [Macquarie Bank] been aware of APRA’s interpretation of the MAC clause, they would have removed the clause earlier to ensure the funding counted toward [the bank’s] LCR.”

The group concluded: “Macquarie will take this opportunity to work with APRA on intra-group arrangements between [Macquarie Group] and [Macquarie Bank] and address any remaining concerns.”

Rabobank Australia CEO Peter Knoblanche also noted that the lender is working to address APRA’s concerns in relation to Rabobank Australia’s funding agreement with its global parent company.

“As noted by APRA, Rabobank Australia is financially sound and has a strong liquidity and funding position,” he said.  

“This matter relates to a type of clause contained within the funding agreement with our parent, which APRA has recently clarified has implications on the way liquidity coverage ratios are calculated and reported. We are working with APRA to ensure this agreement is amended appropriately.”

Berry Marttin, Rabobank’s managing board member responsible for the bank’s international, rural and retail business, added that the Netherlands-based global Rabobank “stood fully behind” its ongoing funding commitment to its Australian subsidiary and the funding agreement was intended to reflect this complete commitment.

An HSBC Australia spokesperson also told Mortgage Business: “As APRA has confirmed, HSBC Australia has maintained a strong liquidity and funding position. We will continue to comply with our legal and regulatory obligations.”

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