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Senate estimates committee uncovers APRA concerns about risk management framework at National Australia Bank.

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Thursday 19 February 2004

Senate estimates committee uncovers APRA concerns about risk management framework at National Australia Bank


MARK COLVIN: Australia's banking reg ulator, the Australian Prudential Regulation Authority or APRA, is again facing accusations that it's not aggressive enough in supervising the financial institutions under its watch. 


It was revealed today that APRA first uncovered risk management flaws at the NAB more than a year before the foreign currency trading scandal exploded in January. 


Although the regulator told the bank's board and senior executives about its concerns, nothing was done to fix a situation which eventually saw Australia's biggest bank lose $360 million in rogue foreign currency trades. 


The revelations, in a Senate Estimates Committee, don't reflect well on either the bank or on the regulator, which is still smarting from its role in the disastrous collapse of the insurer HIH. 


Michael Rowland reports. 


MICHAEL ROWLAND: As part of its supervision of the banking industry APRA pays regular visits to banks and other financial institutions to ensure everything's above board. 


These so-called market risk visits usually straightforward affairs but this clearly wasn't the case for the APRA team casting an eye over trading activities at the National Australia Bank's headquarters in August 2002. 


It was during that visit that the regulators became concerned about the NAB's risk management framework. 


APRA's Chairman John Laker told today's Senate Estimates Committee hearing it wasn't long after that the regulator put its concerns to the NAB's board and its senior executives. 


JOHN LAKER: The discussions that gave rise to our advice to the board and to the senior management at NAB go back some time because the discussions arose out of the onsite visit process that was undertaken, so there was a… 


SENATOR: That was the August 2002 visit?  


JOHN LAKER: There was a fair degree of dialogue and fact-finding and clarification that was done after that. Let me say that it was in the first half of last year.  


MICHAEL ROWLAND: The NAB says a breakdown in its risk management systems was why four rogue currency traders were able to run up losses of $360 million. The bank also insists the unauthorised trading didn't start until October last year. So today's revelations raise questions as to why the bank didn't act on APRA's worries much earlier. 


John Laker. 


JOHN LAKER: We had agreed to a timetable with the NAB to address those concerns. They were working within that timetable. But… and issues were being addressed and resolved within that timetable.  


MICHAEL ROWLAND: But in the midst of all of this former NAB Chief Executive Frank Cicutto signed off on the bank's risk control systems in the annual attestation letter all banking chiefs are required to send to the regulator. 


Labor Senator Stephen Conroy took this discrepancy up with APRA's Tom Karp. 


STEPHEN CONROY: It does appear they were wrong though, doesn't it?  


TOM KARP: Yes, it does, and Frank Cicutto… 


STEPHEN CONROY: Would have been nice if you'd been able to say to them 'no', like a letter back saying 'oi, just a minute Frank we don't think so.' I mean, you didn't send a letter back saying 'oi, we're not sure?' 


TOM KARP: Well, I suppose the only answer to that is Mr Cicutto is no longer there.  


MICHAEL ROWLAND: It's not just the NAB in Labor's sights. APRA's effectiveness as a regulator is once again under question less than a year after being attacked by the HIH Royal Commission for not being aggressive enough to prevent the insurance giant's collapse in late 2000. 


It was a theme pursues by Labor's treasury spokesman, Simon Crean, in Question Time. 


SIMON CREAN: Treasurer, in light of the collapse of HIH, why has APRA under your watch again failed to act on this trading scandal which has cost Australian shareholders millions of dollars?  


PETER COSTELLO: You ask what action has been taken? Well, the Chief Executive has resigned and the Chairman has resigned, Mr Speaker, which to me indicates that the National Australia Bank has taken this quite seriously and Mr Speaker, the Australian Prudential Regulatory Authority will be acting on the Price WaterhouseCoopers report once that it's given, Mr Speaker, and taking all steps in accordance with it.  


MICHAEL ROWLAND: Labor's Senator Conroy, is vowing to pursue APRA over its handling of the NAB's risk control systems.  


STEPHEN CONROY: We will be seeking further information at the earliest opportunity from APRA to find out what those concerns were, what they were doing to get them fixed, and whether or not - this is the ultimate question - whether or not if APRA had more aggressively pursued the NAB management to clean this area up those losses would still have occurred? 


MARK COLVIN: Labor's financial services spokesman Stephen Conroy, ending Michael Rowland's report.