Westpac slammed over cash reserves

Westpac has been forced to hold more cash on its balance sheet after the Reserve Bank found ‘‘serious shortcomings and noncompliance’’ in its risk models.

The Reserve Bank has announced it will require Westpac to hold an extra 2 percentage points of each form of regulatory capital banks are required to hold until the problems are fixed.

Under its operating agreement with the Reserve Bank, Westpac is required to operate approved risk models to calculate how much regulatory capital it needs to hold.

Yesterday the Reserve Bank revealed the outcome of an independent report into Westpac’s operations in New Zealand, which found that 17 out of 35 capital models were unapproved.

At one time 21 of the 32 capital models it used were unapproved.

Operating unapproved models could make it impossible for regulators to determine exactly how risky the bank’s loan book is, or how much capital it should hold to protect customers.

Westpac had noted the breach in its regulatory disclosure at the end of 2016. The problems date back to 2008.

In a statement the Reserve Bank said Westpac had ‘‘materially failed to meet requirements around model governance, processes and documentation’’.

It has been given 18 months to rectify the problems.

The penalty imposed may have little practical impact. In a statement Westpac said its current capital ratios ‘‘are sufficient to accommodate these increases’’.

The bank also said it was ‘‘disappointed’’ not to have met the Reserve Bank’s requirements.