The Macquarie Group Ltd (ASX: MQG) share price may suffer a little on the back of orders by the Australian Prudential Regulatory Authority (APRA). What’s all the fuss about?
The Macquarie share price has already returned to pre-COVID levels but how will this news affect it?
MQG share price
Macquarie needs to improve its risk management
APRA is an independent authority focused on maintaining the safety and soundness of financial institutions across banking, insurance and superannuation in Australia.
It essentially aims to ensure the community has confidence that the financial institutions will be able to meet their financial commitments under all reasonable circumstances.
APRA identified incorrect treatment of specific intra-group funding arrangements and multiple breaches of APRA’s reporting standards on liquidity between 2018 and 2020. It sounds more serious than it really is.
APRA notes the breaches are historical and do not impact the current overall soundness of Macquarie’s capital or liquidity positions. However, APRA advises these breaches do raise questions about Macquarie’s risk management practices and ability to calculate and report key ratios.
Macquarie as well as all the other banks are required to report key ratios to APRA so the independent authority is able to assess the financial health of banks. So, essentially APRA is not happy with Macquarie’s previous standards of reporting.
As a result, APRA will require Macquarie to increase its operational capital by $500 million as well as other liquidity requirements to take effect from 1 April 2021.
Macquarie management views
Macquarie managing director and CEO, Shemara Wikramanayake advised of her disappointment in the historical issues and is focused on trying to work with APRA at a high level of intensity.
The bank also advised it will work with APRA to determine any necessary restatements of selected historical regulatory returns.
My takeaway
Financial institutions have faced intense scrutiny over the last few years, so it is a bit surprising to see such a household name be exposed to such issues.
In saying this, the issues identified do not impact Macquarie’s underlying financial health.
The issue lies with Macquarie’s risk management practices and it appears management has already rectified the historical issues. Whilst risk management is important, such news does not adversely affect the bank’s fundamentals.
I think it’s something to monitor but I would focus on the performance of its key businesses highlighted by my colleague, Jaz Harrison.
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