InvestSMART

ANZ risk managers 'knew of' dangers

A SENIOR ANZ risk management committee examined the the bank's controversial securities lending program and approved its associated risks at least 16 months before the collapse of Opes Prime.

A SENIOR ANZ risk management committee examined the the bank's controversial securities lending program and approved its associated risks at least 16 months before the collapse of Opes Prime.

In 2006, the bank's Credit and Trading Risk Committee (CTC) was briefed on a plan to increase ANZ's exposure to stocks through its equity financing arm to as much as $2 billion over a three-year period.

According to widely distributed ANZ documents, that CTC committee includes the positions of "chief executive, chief risk officer, chief financial officer" and meets every week. It reports directly to the bank's Risk Committee, which meets at least four times a year.

Current ANZ chief executive Mike Smith only assumed a position on the CTC when he took over from John McFarlane in October 2007.

In the wake of Opes Prime's collapse in 2008, Mr Smith ordered a review of the bank's margin lending and equity finance businesses.

That review headed up by insolvency expert David Crawford concluded that the CTC "was not provided with all relevant information" that would have helped it make informed decisions on placing controls over the equities financing business.

However, BusinessDay is aware of a November 2006 presentation that was prepared for the CTC that outlined an extensive chronology of the business.

The presentation also contained revenue projections for the bank's equity finance business it named customers it provided a formula for calculating loan-to-valuation settings and, provided a measure for determining the bank's financial exposure to equity finance.

The presentation also stated that Securities Lending remained a focus for ANZ's custodian services arm, and set out a strategy to build the unit into an operation with earnings of up to $10 million annually.

The confidential presentation concludes that the CTC was "kept informed" of the progress that has been made in the development securities lending business.

It also outlined the bank's internal audit division had monitored progress on equities finance business. In addition, the CTC presentation outlined a plan to perform a stress test of the business in each of the following two years.

Critically, the presentation said a risk setting known as "PCRE" - referring to "potential credit risk exposure" - of 10 per cent would be applied to the equities business policy.

One of the findings of the Crawford review was the CTC was "not expressly alerted to the fact that ... credit limits for equity finance were to be calculated on a potential exposure risk basis".

One of the effects of calculating the limits "was to reduce the visibility" of the equities finance business within ANZ, the Crawford report concluded.

BusinessDay has also learned that ANZ formed a separate Equity Risk Committee in 2006 to keep tabs on its exposure to the growing equity finance business.

The revelations, which have emerged as part of a $285 million lawsuit brought by ANZ's former client Primebroker Securities, differ from some of the the findings of the review.

Even so, the Crawford report was critical of the CTC, noting it "did not apply an appropriate degree of rigour to its consideration of issues relating to the equities finance business".

Last night a spokesman for ANZ said: "The document referred to is five years old and the issues with securities lending have been comprehensively dealt with by the Crawford review".

Two former Primebroker directors have alleged that the bank acted improperly when it called in receivers on the stockbroking firm in July 2008. ANZ has said it will vigorously defend the action.

Just what the CTC committee knew of ANZ's involvement in equities finance business will be central to the case.


Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles