Australia's Macquarie Bank ordered to raise reserves after reporting breaches

[SYDNEY] Australia's prudential regulator on Thursday ordered Macquarie Group's banking unit to increase its cash reserves following material breaches of prudential standards that it said raised serious concerns about the lender's risk controls.

Macquarie Bank is required to hold additional operational capital of A$500 million (S$510 million) after it treated intra-group funding arrangements incorrectly when reporting capital and related-entity exposure, the Australian Prudential Regulation Authority (APRA) said.

The announcement comes as investment banks worldwide risk further regulatory scrutiny following recent risk management debacles, including the collapse of a debt-laden hedge fund that brought heavy losses to some of Macquarie Group's global peers.

JPMorgan analysts said the regulator's "forceful" tone was bad for investor sentiment, given investors' and analysts' view of Macquarie as being on top of compliance obligations.

The broker said "there could be a small (probably immaterial) impact on earnings".

Macquarie's share price was down 1 per cent after the announcement in a broader market that was 0.3 per cent higher.

DISAPPOINTING

Macquarie, which operates Australia's largest investment bank and asset manager, a fast-growing commercial bank and a global commodities trading subsidiary, said it shared the regulator's disappointment and that its banking unit had implemented programmes to strengthen risk management.

The bank breached reporting standards on liquidity multiple times in the years 2018 through 2020 due to deficiencies in its ability to manage operational risk inherent in Macquarie Group's complex intra-group structure, the regulator said.

"For one of the country's largest financial institutions to have committed breaches of this nature is disappointing and unacceptable," APRA Deputy Chair John Lonsdale said.

"We cannot rule out further action as more information comes to light about the root causes of these breaches." Even when contraventions were historical and did not impact the bank's overall soundness, they raised "serious questions"about the bank's risk management practices and its ability to calculate and report key prudential ratios, APRA said.

The regulator also said it will subject Macquarie Bank to increased scrutiny to fix frequent laxity in complying with prudential requirements.

"We will work with APRA through a period of intensified supervision to advance this work as quickly as possible," Macquarie Group's chief executive officer Shemara Wikramanayake said in a statement.

REUTERS