Westpac looks back at ‘bank-killing’ 2008 crisis

Ian Rogers Latest news
Gaily Kelly, May 2008      (AAPIMAGE)
Gaily Kelly, May 2008 (AAPIMAGE)

An unexpected short appraisal of the history of a liquidity crisis that ensnared Westpac among the ranks of near-failures at the apex of the financial crisis in late 2008 is the real gem tucked into the bank’s self-assessment on risk governance.

Released by Westpac yesterday to allow understanding of APRA’s $500 million capital sanction on the country’s second-largest bank, this brief but important glimpse into the period is a marker of shifting cultural awareness and responsibility at the bank.

“The global financial crisis forced Westpac to focus with sustained urgency on funding, liquidity risk and capital levels,” this section of the assessment begins, true of the entire Australian banking industry at the time.

For Westpac, under the new leadership of Gail Kelly (the former St George Bank CEO) from February of that year “it was a turning point in the management, regulation and public perception of banks, the effects of which are felt strongly to this day,” the Review Team write in this report.

In a stark language stripped of detail, the history admits to “the bank-killing potential of liquidity and credit risk events” facing the bank “was necessarily given priority during extended periods of crisis.”

And thus “Westpac has been compelled to turn its attention over the past decade to an array of non-financial risks.”

When, if ever, the bank follows up with more openness over the details, the dates and the dramas of those days, Westpac will be well down the road to allowing the Australian public a fuller explanation of precisely which large banks – maybe more than one – was in a state of supreme distress during the second week of October 2008.
In his recent memoir, former prime minister Kevin Rudd wrote “We were particularly worried about three Australian banks – two second tier, one first tier – as we developed a range of contingency plans to prevent the collapse.”

National Australia Bank is another first tier bank potentially in the frame. In November last year at the banking royal commission, former NAB chair (and former Treasury secretary) Ken Henry explained APRA’s deep focus on the overhang of balance sheet risks facing the Australian banks and in particular, funding and liquidity risk.”

In the Westpac assessment technology risk mishaps, closely related to the takeover of St George, round out this section.

“While Westpac grappled with the financial risks of the GFC and the complexities of its 2008 merger with St George, it contended with another challenge.

“Following an extended period of what, in hindsight, was underinvestment in technology, it was confronted late last decade by a range of significant maintenance and stability problems.

“The merger with St George in December 2008 also added a large suite of systems to the already-complex Westpac Group environment, including systems from earlier St George acquisitions that had not been integrated with St George parent systems.

“The work to integrate Westpac and St George systems following the merger proved more difficult and protracted than was expected,” a topic reported on (amid much controversy) by Banking Day in early 2011.

This part of history adds detail to the recent candour of current CEO Brian Hartzer on this difficult subject.

“There is still a legacy of complexity, replication and high cost of maintenance and change,” Westpac’s reviewers admit.

“That legacy has to an extent been self-perpetuating, as the change needed to undo it is complicated and expensive, and the organisation has added layers of business process in the course of adapting to it over ten years.”