25 June 2018
Ombudsman calls for a more rigorous public examination of CBA/Bankwest by Royal Commission
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has called for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to more rigorously examine a range of unanswered questions regarding the Commonwealth Bank of Australia (CBA) treatment of Bankwest loans.
“The CBA treatment of Bankwest commercial loans has shocked many people and left them searching for answers despite many inquiries,” Ms Carnell said today. “This ultimately was a driver for the Royal Commission.
“To finally get closure on this saga will allow bank victims to get on with their lives and for trust in banks to be improved.
“This will require a rigorous public examination of unanswered questions and to put to rest if CBA conduct was appropriate or below customer expectations, or worse.
“There are high expectations the Royal Commission will do so but the Commissioner will obviously need sufficient time to examine these complex matters fully.
“What is critically important is that individual cases allow an examination of the overarching processes and practices applied by CBA to the Bankwest loan book.”
• What were the objectives and directives from senior management?
• What targets were set and why?
• Were business units incentivised to meet targets?
• What consequences did this have on the fair treatment of targeted borrowers?
Ms Carnell said the particular questions she has from evidence given in Round 3 are as follows.
1: CBA bought Bankwest at a significant discount (0.8 times book value) and knew from the outset that part of the Bankwest loan book would have a higher level of risk than the CBA book. What was CBA senior management’s objective and strategy to manage this from the outset? In the Royal Commission’s Background Paper 13, APRA has made a footnote comment that in limited circumstances, it is possible an authorised deposit-taking institution (ADI) using the Internal Ratings-Based (IRB) approach might obtain a capital benefit where it purchases a loan that has already become impaired, and the purchase price is significantly discounted from the loan amount. What does this mean when applied to the purchase on Bankwest?
2: Did CBA senior management set targets and timeframes for risk reduction to reduce exposure to loans in particular sectors? If so, were target reduction timeframes unusually short? What pressure was applied to Business Units to deliver reduction targets, and what practices and behaviours did they employ in respect of loans to meet these targets?
3: How were breaches of loan conditions assessed? What role did the use of internal valuations and non-monetary default contract clauses play? What were the consequences of identifying such breaches?
4: When loans were transferred to the Credit Restructuring Unit (Credit Asset Management/CAM), is there evidence of genuine attempts to restructure, implement turnaround strategies or reasonable exit strategies? What was the impact of the risk reduction targets on the usual practices and behaviours in this unit?
5: What was the total economic capital reduction benefit achieved by CBA from Bankwest legacy loans removed from the loan book? Did the commercial benefit of this action outweigh the accumulated loan ‘losses’ from impaired loans? Did losses also include benefits of re-pricing impaired loans, such as penalty interest and additional fees and charges associated with the exit process?