National Australia Bank (NAB) has revealed that the Australian Prudential Regulation Authority (APRA) has closed the remaining remedial actions associated with the foreign exchange options trading losses that were revealed in January 2004 (Profit & Loss, February and April 2004).
The critical element in APRA’s decision is that it has approved NAB’s return to the use of the internal model for the calculation of the market risk component of risk weighted assets. This means that from 1 January 2007, NAB will be able to re-establish a fully-fledged FX options business. As a result of APRA’s investigation into the AUD 360 million losses, NAB was barred from holding FX option-related risk, having to back-to-back all customer transactions.
APRA has been gradually easing the restrictions on NAB’s trading operation for the last year as the bank worked its way through the remedial actions, in closing the book on the matter, it has now removed the regulatory requirement to maintain a capital target of 10%, effective immediately.
Although NAB is now able to re-enter the professional FX options market as a principal rather than as a client, the market will be seeing a new NAB. Over the past year as part of its restructuring the bank has scaled back its non-AUD and non-Australian client activities. This was indicated in its recent 2006 profit announcement, which indicated that the bank’s internal model applied at 30 September 2006, then on a pro-forma basis, would reduce previously advised risk weighted assets by “approximately $9.9 billion”.
National Australia Bank Group chief executive officer, John Stewart, welcomed the closure of the program and thanked APRA for the professional and constructive way in which the program had been undertaken. “Today’s outcome is very pleasing, but we recognise that there is more work to be done as part of a continuous improvement program to ensure our risk management framework continues to strengthen,” he says. “Everyone at the National Australia Bank is looking forward to continuing to develop a business that is well regarded by all our stakeholders and creates sustainable satisfactory returns for shareholders.
“Together with the positive assurance from our independent auditors over internal controls that we received as part of our annual financial close, and as published in the annual financial report on 1 December 2006, this marks a major step forward for the organisation,” Stewart adds.