Flying without a radar at ANZ
The Crawford review into securities lending at ANZ Bank paints the disturbing picture of a bank where the systemic failure of risk management processes went undetected for years.
As Mike Smith started delving more deeply into the breakdown of ANZ Bank's risk management processes as part of the Crawford review of its securities lending in the wake of the Opes Prime debacle he would, one imagines, have started to feel quite queasy.
It is every bank chief executive's nightmare to have a risk management debacle occur on his watch. While Smith could console himself that, given he took the role on only late last year, he had no responsibility for the failure of the bank's processes, he would have been alarmed and shaken at the insight the review provided into how complete that failure was.
Take a look at the key findings of the review.
The staff directly involved didn't understand the distinction between securities lending and equity financing. Nor their different risk profiles, nor the reputational and financial risks involved – the people managing the business didn't understand it!
Neither did people outside the business properly appreciate the existence and scale of the equity financing activity the bank was involved in. Perhaps that was because it doesn't appear there was ever any approval given by the bank for the business to offer the equity financing product.
There was no proper control framework and the absence of one wasn't identified until 2005 – at least four years after ANZ had, apparently unwittingly, evolved what had been a securities lending business into an equity financing business.
There was poor accountability within both the business and the bank's risk management functions, with responsibility resting largely with committees who made a dangerous situation worse because they were poorly structured and managed.
There were some warning signs but the responses to them, when they occurred, were ineffective and tardy – despite a string of internal audit flags from 2005 on, ANZ was still implementing some of its controls as late as March this year, after the horse had well and truly bolted.
The review says that even as the issues emerged there was a failure to report them to the CEO and board. That is convenient, although bad news in large organisations does travel slowly.
That reads like, and was, a total breakdown in ANZ's risk management processes. Not surprisingly, Smith has appointed a new chief risk officer, Chris Page. Page, because he only joined the bank in January, comes without baggage and, after 34 years at HSBC, a lot of experience in managing risk. The bank is also looking for a new managing director for its institutional bank.
The question that would have given Smith restless nights is whether the breakdown in ANZ's risk management was isolated to the equity financing business or whether it is reflective of a more general laxity in the bank's systems, processes and culture.
A core competency, and an absolutely essential competency, for any bank is its ability to manage risk and the frameworks it builds to do so. That is what banks do. They manage risk.
That's why any breach is taken so seriously and why the fallout from, for instance, National Australia Bank's foreign currency options trading scandal was so far out of proportion to the actual losses involved. It is also why it is improbable that the casualties of ANZ's risk management breakdown will be confined to a couple of senior executives and a handful of more junior employees.
While the financial losses from the affair are relatively modest the reputational damage and the doubt it has cast over the bank's competency are extremely damaging.
Even if Smith himself weren't motivated to conduct an urgent and comprehensive review of the wider risk management environment in the bank, and Smith lacks neither motivation nor resolve – there is a core of real toughness beneath the urbane exterior – his regulator would be swarming all over the bank. He has certainly moved swiftly to strengthen the risk management framework in response to the Crawford review findings.
The ANZ board, however inadequate the information flow they were receiving, have to take some responsibility for what has occurred. The moment warning bells started ringing about the effectiveness of the controls within the equity financing business the audit and risk management committees should have been alarmed and forced urgent remediation.
Smith's status as a newcomer and the immediacy of his response to the crisis as it emerged will help prevent the review's findings from completely destabilising his management, which is what occurred at NAB.
There are plenty of institutional shareholders in the bank, however, that were already starting to lobby for long-serving ANZ chairman Charles Goode to depart the boardroom long before the aftershocks from the collapse of Opes Prime enveloped the bank. The Crawford review, with its insights into such a fundamental breakdown in the bank's prudential framework, has handed them the ammunition they need.
It is every bank chief executive's nightmare to have a risk management debacle occur on his watch. While Smith could console himself that, given he took the role on only late last year, he had no responsibility for the failure of the bank's processes, he would have been alarmed and shaken at the insight the review provided into how complete that failure was.
Take a look at the key findings of the review.
The staff directly involved didn't understand the distinction between securities lending and equity financing. Nor their different risk profiles, nor the reputational and financial risks involved – the people managing the business didn't understand it!
Neither did people outside the business properly appreciate the existence and scale of the equity financing activity the bank was involved in. Perhaps that was because it doesn't appear there was ever any approval given by the bank for the business to offer the equity financing product.
There was no proper control framework and the absence of one wasn't identified until 2005 – at least four years after ANZ had, apparently unwittingly, evolved what had been a securities lending business into an equity financing business.
There was poor accountability within both the business and the bank's risk management functions, with responsibility resting largely with committees who made a dangerous situation worse because they were poorly structured and managed.
There were some warning signs but the responses to them, when they occurred, were ineffective and tardy – despite a string of internal audit flags from 2005 on, ANZ was still implementing some of its controls as late as March this year, after the horse had well and truly bolted.
The review says that even as the issues emerged there was a failure to report them to the CEO and board. That is convenient, although bad news in large organisations does travel slowly.
That reads like, and was, a total breakdown in ANZ's risk management processes. Not surprisingly, Smith has appointed a new chief risk officer, Chris Page. Page, because he only joined the bank in January, comes without baggage and, after 34 years at HSBC, a lot of experience in managing risk. The bank is also looking for a new managing director for its institutional bank.
The question that would have given Smith restless nights is whether the breakdown in ANZ's risk management was isolated to the equity financing business or whether it is reflective of a more general laxity in the bank's systems, processes and culture.
A core competency, and an absolutely essential competency, for any bank is its ability to manage risk and the frameworks it builds to do so. That is what banks do. They manage risk.
That's why any breach is taken so seriously and why the fallout from, for instance, National Australia Bank's foreign currency options trading scandal was so far out of proportion to the actual losses involved. It is also why it is improbable that the casualties of ANZ's risk management breakdown will be confined to a couple of senior executives and a handful of more junior employees.
While the financial losses from the affair are relatively modest the reputational damage and the doubt it has cast over the bank's competency are extremely damaging.
Even if Smith himself weren't motivated to conduct an urgent and comprehensive review of the wider risk management environment in the bank, and Smith lacks neither motivation nor resolve – there is a core of real toughness beneath the urbane exterior – his regulator would be swarming all over the bank. He has certainly moved swiftly to strengthen the risk management framework in response to the Crawford review findings.
The ANZ board, however inadequate the information flow they were receiving, have to take some responsibility for what has occurred. The moment warning bells started ringing about the effectiveness of the controls within the equity financing business the audit and risk management committees should have been alarmed and forced urgent remediation.
Smith's status as a newcomer and the immediacy of his response to the crisis as it emerged will help prevent the review's findings from completely destabilising his management, which is what occurred at NAB.
There are plenty of institutional shareholders in the bank, however, that were already starting to lobby for long-serving ANZ chairman Charles Goode to depart the boardroom long before the aftershocks from the collapse of Opes Prime enveloped the bank. The Crawford review, with its insights into such a fundamental breakdown in the bank's prudential framework, has handed them the ammunition they need.
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