Bankwest and Landmark
The committee has received a range of allegations about the 2008
Bankwest commercial loan book and what caused a rate of loan failures that
stood out from the rest of the banking industry. In this chapter the committee
has collated those allegations and the responses from the Commonwealth Bank.
This chapter also covers allegations in relation to the acquisition of Landmark
The Senate Economics References Committee inquiry into the post-GFC
banking sector devoted four chapters to issues related to the Bankwest loan
The Senate Economics Reference Committee inquiry into the post-GFC banking
sector noted that businesses and their loans can fail due to both external
events and internal events. The Senate Economics Reference Committee found that
internal events may include poor management, the business not being
commercially viable, and inappropriate debt levels. The debt levels described
in some submissions to that inquiry involved a level of risk that left
businesses unable to be resilient even in times of relative economic stability,
and which led the committee to conclude:
While there are many sad and distressing stories now on the
public record, the committee cannot help but observe that, in some cases,
although the aggrieved borrower may have been able to operate successfully
during periods when the business environment was relatively good, the more
challenging times presented by the global financial crisis placed extra stress on
less robust and more speculative projects. In many cases, loans were sought for
ventures that were a considerable risk even during the more stable economic
environment that existed prior to the global financial crisis; this is
evidenced by the cases where banks other than Bankwest had refused to finance
the initial loans.
This section summarises information that has come to the committee's
attention during the present inquiry regarding Bankwest including:
the collapse of Bankwest's parent company, HBOS;
the role of the government in the acquisition of Bankwest by the
a timeline for the acquisition of Bankwest by the Commonwealth
allegations regarding a deliberate strategy by the Commonwealth
Bank to impair loans in order to seek financial benefit.
The collapse of HBOS
This section summarises the collapse of Bankwest's parent company HBOS
and the banking strategies employed prior to the collapse of HBOS. The post-GFC
Banking inquiry noted that Bankwest was dependent on its UK-based parent
company HBOS for 35 per cent of its funding. HBOS, which was highly exposed
during the GFC, experienced a run on its shares and was subsequently acquired
On 5 April 2013, the UK Parliamentary Commission on Banking Standards published
a report on the failure of HBOS, titled An accident waiting to happen. The
report drew a number of conclusions about HBOS, including that:
...the downfall of HBOS was not the result of cultural
contamination by investment banking. This was a traditional bank failure pure
and simple. It was a case of a bank pursuing traditional banking activities and
pursuing them badly...prudential supervisors cannot rely on financial markets to
do their work for them. In the case of HBOS, neither shareholders nor ratings
agencies exerted the effective pressure that might have acted as a constraint
upon the flawed strategy of the bank. By the time financial markets were
sufficiently concerned to act...financial stability was already threatened.
The UK Parliamentary Commission on Banking Standards, in its report on
the failure of HBOS, suggested that 28 percent of the Bankwest loan book
was impaired at the end of 2008 and that such a loss was striking in view of
the comparative resilience of the Australian economy.
The report also noted that for HBOS:
In two markets alone—Australia and Ireland—it incurred
impairments of £14.5 billion in the period from 2008 to 2011. These losses were
the result of a wildly ambitious growth strategy, which led in turn to
significantly worse asset quality than many of its competitors in the same
markets. The losses incurred by HBOS in Ireland and Australia are striking, not
only in absolute terms, but also in comparison with other banks...The repeated
reference in evidence to us by former senior executives to the problems of the
Irish economy suggests almost wilful blindness to the weaknesses of the
portfolio flowing from their own strategy.
In 2003 Bankwest embarked on an
aggressive growth strategy focused on the east coast states with the aim of
opening 160 branches over
The ACCC described this expansion as 'unprecedented in Australian banking'. It was also reported that in 2007
Bankwest's lending increased by 36 percent. Some submitters advised the
committee that Bankwest was the only bank that would consider their loan
Role of the Commonwealth
government in the Bankwest acquisition
This section briefly summarises the role of the Commonwealth government
in the acquisition of Bankwest by the Commonwealth Bank.
The proposed acquisition of Bankwest by the Commonwealth Bank was
subject to a Public Competition Assessment by the Australian Competition and
Consumer Commission (ACCC) because the acquisition was considered to raise
issues of interest to the public. The ACCC described the impact of the GFC on
banking in Australia as follows:
Since July 2007, the global financial crisis has had an
impact on the competitive dynamic in banking markets...the increased cost of
wholesale funds since late 2007, many non-bank lenders who were reliant on
wholesale markets for their funding have had to exit the Australian market.
Other market players, including smaller authorised
deposit-taking institutions (ADIs) with low deposit bases, have had to withdraw
from lending in some areas or to some customers.
In considering the Commonwealth Bank's proposal to acquire Bankwest, the
ACCC considered the viability of Bankwest if it was not acquired and reported
The financial situation and risk appetite of HBOS (or a
merged Lloyds/HBOS with 40% UK Government ownership) is such that these
companies would no longer continue to grow the BankWest business. Not only
would this likely see a cessation of the bank’s east coast expansion plan, but
also the aggressive pricing targeted at growing market share.
On 5 December 2008 the Treasury received the Commonwealth Bank's
application to acquire Bankwest under the Banking Act 1959, for approval
under the Financial Sector (Shareholdings) Act 1998 (FSSA). When
assessing the application, in addition to the above mentioned Public
Competition Assessment by the ACCC, the Treasurer also considered the national
interest under the FSSA.
On 18 December 2008 the then Treasurer announced the approval of the Commonwealth
Bank acquisition of Bankwest, making it subject to several conditions including
the maintenance and growth of the Bankwest brand and branches.
As part of its response to the GFC, the Commonwealth government
introduced a guarantee on retail deposits and a wholesale funding guarantee for
ADIs. The retail deposit guarantee came into effect in October 2008 and applied
to all ADIs, including foreign banks with operations in Australia. The
wholesale funding guarantee came into effect on 28 November 2008 for eligible
ADIs that registered for the scheme. However, for foreign bank branches, such
as Bankwest, the guarantee only applied in respect of their short term
wholesale funding raised from Australian residents with maturities up to the
end of 2009.
The average daily value of Bankwest securities covered by Commonwealth
guarantee was first reported at $276 million in December 2008, peaking at $644
million in April 2009 and gradually reducing to zero by early 2011.
for the Bankwest acquisition by the Commonwealth Bank
Mid September 2008#
Lloyds announced a proposal to acquire HBOS, with UK
Government to take a 40 percent stake in the merged firm.
Bankwest's intragroup funding estimated to be as
high as $18b.
8 October 2008#
Commonwealth Bank announces proposal to acquire
Bankwest and St Andrew's for 0.8 times the book value, which is low
compared to the nine precedents for which the average is 1.9 times book
8 October 2008*
Commonwealth Bank entered into a Share Sale Deed
with HBOS Australia and HBOS plc, which set an initial purchase price of
$2.1b, with any amount owing by a Bankwest group company to the HBOS group to
be paid in full by that Bankwest group company up to $14.5 billion on 19
December 2008, with any amounts in excess of this to be repaid on 19 June
20 October 2008#
ACCC Public Competition Assessment commenced
28 November 2008#
Australian government wholesale funding guarantee
comes into effect, but Bankwest was not eligible.
10 December 2008#
ACCC Public Competition Assessment decision formed the view that the proposed acquisition would
be unlikely to result in a substantial lessening of competition in any of the
19 December 2008*
Completion date, initial purchase price of $2.1b paid to HBOS, along with $14.5b for
19 December 2008*
By this date Bankwest had borrowed $3.751b from the
Reserve Bank of Australia (excluding interest) and used these funds to repay
a portion of its intragroup funding with HBOS prior to completion.
31 December 2008*%
Bankwest year end. Commonwealth Bank half-year end
results indicate $328m for an initial estimate of the outcome of the price
adjustment mechanism contained in the Share Sale Deed.
Bankwest repaid the RBA funding amount of $3.77b
(including interest) in January 2009 and increased its funding from
11 February 2009*
Commonwealth Bank half-year and financial statements
released, including disclosure of provisional acquisition accounting of
19 February 2009*
Draft Completion Balance Sheet (DCBS) prepared for HBOS by KPMG for accounts as at 19 December
2008. This resulted in a proposed increase to the purchase price of $197m.
17 April 2009*
PwC issues report to Commonwealth Bank based on DCBS
on a range of disputed items, including the potential understatement of loan
20 April 2009*@
Commonwealth Bank dispute notice sent to HBOS
with 22 items disputed. Two of the items related to impairment of loans, with
a combined value of $418m.
6 June 2009*
Ernst & Young appointed as the independent
expert to review the disputed items and determine the final purchase
19 June 2009*
The excess funding amount between HBOS and Bankwest
was determined to be $744m. In accordance with the Share Sale Deed, $744m was
settled with HBOS, bringing the total funding repaid to $19.027b.
30 June 2009*
Commonwealth Bank financial year end.
7 July 2009*@
Independent expert determination, final purchase price of $2.126b agreed being a net
price increase of $26m after taking into account price increases and
decreases arising from the 22 disputed items. Two of the 22 disputed items
related to impairment of loans, together these two items accounted for a
$156.6m price decrease.
9 July 2009*
Final acquisition payment, $26m paid to HBOS.
12 August 2009*
Commonwealth Bank year-end financial statements
released, including details of the Bankwest acquisition.
Project Magellan commenced by the Commonwealth Bank to evaluate the
adequacy of loan impairments for 1100 higher risk non-retail Bankwest customer
files including targeting property finance, aged care and hotel sectors,
covering security valuations greater than $5m or greater than two years old.
for the information in the timeline include the #ACCC Public
the * Commonwealth Bank answers to questions on notice,
@the dispute notice,
% Commonwealth Bank response to submission 109 by Mr Trevor Hall.
of a deliberate strategy to impair loans
This section sets out allegations put to the committee regarding a
deliberate strategy by the Commonwealth Bank to impair loans in order to seek
financial benefit from Bankwest acquisition contract clauses, including:
changes to the initial purchase price;
a price adjustment mechanism;
payment of an excess loan amount;
the use of warranty clauses;
that the Commonwealth Bank sought to close the commercial loan
that the Commonwealth Bank's review of the Bankwest commercial
loan book called project Magellan was a deliberate strategy to impair loans;
allegations about capital holding requirements under prudential
The Commonwealth Bank's response to each allegation is also discussed.
A number of these allegations were considered by the Senate Economics
References Committee inquiry into the post-GFC banking sector. That committee
In examining the Bankwest issue, some individuals put forward
the terms of the purchase agreement entered into by the CBA to acquire Bankwest
as an explanation for what occurred. The committee notes these concerns but
believes other factors such as the deterioration of the property market and
general anxiety about the business and economic environment seem more
significant based on the evidence available.
Several submitters and witnesses have suggested to the committee that
new evidence has become available to shed further light on the allegations
regarding the initial purchase price for Bankwest, the price adjustment
mechanism and the warranty and excess loan amounts.
These allegations and the responses received from the Commonwealth Bank are set
out in the following sections.
Allegations regarding the initial
purchase price for Bankwest
The committee heard the allegation that the Commonwealth Bank may have
incorrectly reported the initial purchase price for Bankwest:
The actual purchase price agreed with HBOS can also be
verified from the 8 October Investor pack, where...the CBA states
that the purchase price is 0.8 times the 2007A book value. The 2007A book value is verified in the Investor Pack as being for $3,050 million. Thus, 0.8 purchase
price multiplied by $3,050 book value equals $2,440 million. This amount bears
close similarity to the theoretical estimate of the agreed purchase price for Bank[w]est, as at 8 October 2008.
A similar allegation was made, with the claim that the difference in
purchase price represented a clawback based on impaired loans:
...the agreed purchase consideration was... actually $2.428
The bank handed over $2.1 billion and they withheld $328
million. They then conducted this review and...increased the losses and backdated
the provisions. They increased the losses so much that the price of the bank
reduced, so they did not have to pay $328 million; they only had to pay a final
additional payment of $26 million—a clawback saving of $302 million.
Bank response to the Bankwest purchase price allegations
The Commonwealth Bank provided the following response to these
[The allegations fail] to note that Commonwealth Bank’s
Investor Presentation dated 8 October 2008 stated that book value is defined as
ordinary shareholders’ equity, which excludes redeemable preference shares
issued by Bankwest. As shown below the initial purchase price is $2,100 million
as Commonwealth Bank has consistently stated, not $2,440 million.
The sum of $328 million in the Profit Announcement for the
half year ended 31 December 2008 represented an initial estimate of the outcome
of the price adjustment mechanism contained in the Share Sale Deed for the
acquisition of Bankwest. An estimate was included as the Profit Announcement
was finalised before the release of the draft completion balance sheet from
Allegations regarding the price
The committee heard allegations regarding the price adjustment mechanism
in the Bankwest acquisition:
From 8 October 2008, the CBA began with the construction of a
process to impair and provision the Bankwest Commercial Loan Book, utilising
the BankWest purchase
price and outstanding wholesale
funding amounts in an attempt
to effect (but not openly),
its plan to reduce the Final Purchase Price paid for BankWest.
In this fashion, the Share Sale Deed provisions enabled CBA to:
avoid payment of the balance of the Final Purchase Price of $328
claw back, and / or offset from the loan outstanding to HBOS, all amounts of provisioned and impaired debts up-‐to the entire amount of the Initial Purchase Price.
The committee heard the allegation that:
The central allegation of the CBA/Bankwest unconscionable
conduct is that CBA had a financial motive to force Bankwest commercial loan
customers into insolvency in order to obtain a discount on the purchase price
from HBOS by way of an impairment indemnity - referred to as “clawback”.
These losses could be incurred firstly, prior to the purchase
on 19th Dec 2008 or secondly, retrospectively after the purchase as long as the
impairment date was successful backdated to 19th Dec 2008.
Another submitter raised similar concerns:
Having read the contract of sale between the CBA and HBOS
Australia it would appear that there were two (2) opportunities for the CBA to
reduce the purchase price. The first opportunity was referred to as the Adjustment
to the Purchase Price, in
clause 10 of the Share Sale Deed. The Second opportunity was the warranty
provisions of the Share Sale Deed under clause 15 Warranties and clause 16 Limitations
However, [the] 20 April 2009...“Sale Deed--‐Draft Completion
Balance Sheet Dispute Notice”...references Clause 10 of the Share Sale Deed. Page
six...refers to the adjusted purchase price calculated by HBOS Australia
reflecting the trading results up to 18 December 2008. Based upon these results
HBOS Australia had requested an increase in the purchase price from $2,100
million to $2,296.8 million being an increase of $196.8m.
The CBA claimed a reduction to this increased price in the
amount of $490.8m. The majority of this claim for a reduction in price was
based upon provisions made against customer loans for anticipated losses that
were identified by the CBA within the first 40 working days following
Commonwealth Bank response to the
price adjustment allegations
The Commonwealth Bank provided the following response to the allegations
that the Commonwealth Bank deliberately impaired loans in order to use the
price adjustment mechanism in the Share sale deed to reduce the purchase price
Upon release of the draft completion balance sheet, the
estimate of $328 million was revised downwards to $196.8 million. This was
further revised to $26.1 million upon the Independent Expert’s determination
under the price adjustment mechanism, resulting in a final purchase price of
Contrary to [the] submission, the estimated balance of the
purchase price ($328 million) was not reduced through Commonwealth Bank
manipulating the level of impaired loans. The estimate was firstly reduced
through HBOS’ Draft Completion Balance Sheet delivered on 19 February 2009 and then
through the price adjustment mechanism determination of the Independent Expert.
Both these processes occurred in accordance with the provisions of the Share
The sale deed for the acquisition of Bankwest by the Commonwealth Bank
included a price adjustment mechanism to take account the fact that it was not
possible to calculate the final accounts until sometime after time of sale
date. In the event that there was a dispute relating to the price adjustment
mechanism, the sale deed provided for an expert determination to be conducted
by Ernst & Young. The price adjustment mechanism was triggered by the 20
April 2009 sale deed draft completion balance sheet dispute notice, in which 22
items were disputed. Two of the 22 items related to loan impairments in which the
Commonwealth Bank sought to increase impairment provisions by $418m consisting
$232m for individual provisions and impairment losses on loans
and advances; and
$186m for group collective provisions and impairment losses on
loans and advances.
Through answers to questions on notice, the Commonwealth Bank informed
the Committee that:
The Independent Expert determined that Bankwest’s
individually assessed provision on specific disputed loans should be increased
by $106.5 million
and Bankwest’s collective provision should be increased by $50.0
million, equating to $156.5 million before tax and capital impacts to reflect
the need for higher loan impairment provisions as at 19 December 2008.
No further adjustments could be made to the final purchase
price, once it was determined by the Independent Expert. PwC in its role as
external auditor performed procedures in relation to the final purchase price
and identified no errors. In addition, PwC states it was not aware of any other
agreement relevant to determining the purchase price of the acquisition.
The Commonwealth Bank informed the committee that there were no other
periods for review or reassessment of loans or price adjustments that occurred
in addition to the loans considered in the July 2009 expert determination. The
Commonwealth Bank also confirmed that there were no other agreements entered
into between the Commonwealth Bank and HBOS that varied the purchase price
subsequent to the Independent Expert’s determination. The Commonwealth Bank
also informed the committee that its lawyers Herbert Smith Freehills and auditors
PwC have also confirmed that they are not aware of any other agreement relevant
to determining the purchase price of the acquisition.
Allegations regarding excess loan
The committee heard the following allegation regarding an excess loan
amount associated with the acquisition of Bankwest by the Commonwealth Bank:
...the CBA did not pay the entire [$17 billion] amount of wholesale funding to HBOS on
The $4.6 billion loan amount that the CBA has not paid back to HBOS for the purchase, meant that they were not required to
the entire purchase price in the market because they had obtained $4.6 billion of it by way of vendor finance.
Clause 12. (c) of the Share Sale Deed limited the CBA’s obligations for
payments of Bank[w]est’s indebtedness to the HBOS companies to $14.5 billion
with the remainder, the “Excess Amount”, payable in
6 months from that date.
A similar allegation was made by another submitter:
...it would seem that the CBA was required to pay $2.1 billion
for the BW business and to pay a further $17 billion for funding. On the day of
settlement the CBA did paid the $2.1 for the BW business but only $14.5 billion
for the funding. The CBA was required to pay a further $2.5 billion within 6
months from the date of the settlement...Did the CBA ever pay the remaining $2.5
billion to HBOS? 
Commonwealth Bank response to the excess
loan amount allegations
In answers to questions on notice the Commonwealth
Bank provided the following additional information regarding the excess
loan amount and the funding for the Bankwest acquisition:
In the Share Sale Deed, the
parties agreed any amount owing by a Bankwest group company to the HBOS group
would be paid in full by that Bankwest group company up to $14.5 billion on 19
December 2008, with any amounts in excess of this to be repaid on 19 June 2009.
The cash flows that occurred on 19 December 2008 are as follows:
The Commonwealth Bank provided the following response to allegations regarding
the excess loan amount:
A central proposition in the submission...is that HBOS
subsidised Commonwealth Bank’s acquisition of Bankwest to the amount of $4,587
million through the “Excess Amount”.
The Excess Amount due to HBOS as at 31 December 2008 was $744
million. “Payables due to financial institutions” included this Excess Amount
($744m), a loan from the Reserve Bank of Australia ($3,751 million) and other
miscellaneous payables ($92 million).
By 19 December 2008, Bankwest had borrowed $3,751 million
from the Reserve Bank of Australia (RBA) (excluding interest) and used these
funds to repay a portion of its intragroup funding with HBOS prior to
completion. Bankwest repaid the RBA funding amount in January 2009 and increased
its funding from Commonwealth Bank. The excess funding amount between HBOS and
Bankwest was determined to be $744 million. In accordance with the Share Sale
Deed, $744 million was settled with HBOS on 19 June 2009. No further payments
were made to HBOS in relation to funding commitments.
Allegations that loans were
impaired to access a warranty
The committee also received allegations that the Commonwealth Bank
impaired loans in order to access a warranty under the acquisition of Bankwest:
The net effect of these clauses are that under the Warranty
provisions of the Share Sale Deed...the CBA was able to claim from HBOS for
impaired assets not provided for by HBOS in the Draft Audited Finalisation
Accounts...By this I mean provided that the CBA made a claim for an impaired
asset within 20 days of its knowledge of an impairment and 12 months of the
completion of the purchase of the Bankwest Shares the CBA had an unlimited
amount of time in which spread out the foreclosures over the following years.
It is possible that after a certain amount of individual claims CBA would
effectively buy Bankwest for nothing.
It is contended that it was for this motivation that the CBA
continued with its aggressive foreclosures on the Bank[w]est Commercial loan
book well beyond the conclusion of the price adjustment mechanism adjudicated
by Ernst & Young in July 2009.
Allegations were also made in relation to warranty claims:
Subsequent to the impairment and provisioning of loans that
were stated on the dispute notice, you identify them on the basis that in the
12 months that followed from 19 December 08 to 19 December 09, a great number
of loans were provisioned and impaired, and a warranty claim was clearly made
on the seller's guarantor. The seller's guarantor was HBOS plc, which was the
Similar concerns regarding warranty clauses in the share sale deed were
...it would appear that:
- The parent company of HBOS
Australia being HBOS plc. (UK) provided a warranty to the CBA.
- This warranty was limited in
value to the initial purchase price, as defined in the Share Sale Deed as $2.1
- The warranty was limited to
matters that became known to the CBA after the sale.
- The warranty was limited to
a period of one (1) year after the sale.
Alternatively did the CBA rely on the warranty provisions in
Share Sale Deed to create a second “claw back” event based upon the impairment
of commercial loans during the warranty period?
Another submitter alleged:
They had 18 months which, we assume, was their negotiated
warranty period during which they could make HBOS pay for it. It is a strange
thing that, if you do the maths, it hits the wall at 18 months—which is the end
of the warranty period, or the amended warranty period—and then they turn into
a good bank.
Commonwealth Bank response to the
The Commonwealth Bank informed the committee that it did not make any
formal warranty claim under the Bankwest share sale deed, however there were
three matters capable of a warranty claim that did not relate to customer
basis swaps between Bankwest and Bank of Scotland entities;
eBusiness information technology platform invoices; and
HBOS exposures such as letters of credit and bank guarantees.
The Commonwealth Bank informed the committee that:
In respect of these three matters, Commonwealth Bank, HBOS
plc and Lloyds International Pty Ltd (formerly HBOS Australia Pty Ltd) entered
a commercial settlement on 11 December 2009.
Commonwealth Bank received a payment of A$5,360,193 on 15
December 2009 under the settlement. The parties also released each other from
claims under the Share Sale Deed, including any warranty claims other than
warranties relating to ownership and structure of the Bankwest Group and
warranties relating to tax matters. Commonwealth Bank has not made any claims
under these warranties.
The committee questioned the Commonwealth Bank on whether there were any
other agreements between the Commonwealth Bank, HBOS and other parties relating
to the Bankwest acquisition. The Commonwealth Bank informed the committee about
ancillary agreements which do not appear to relate to customer loans:
a deed to terminate agreements between Bankwest and HBOS;
three transitional services agreements to enable continued banking
three software licence agreements; and
a records deed to transfer records.
Allegations that the Commonwealth
Bank did not want the commercial loan book
The committee heard from a submitter that in his view, the Commonwealth
Bank did not want the Bankwest commercial loan book and that the Commonwealth Bank proceeded to actively take
steps to remove those loans from its portfolio:
At the time that the CBA entered
into the Bank[w]est Share Sale Deed, it had formed the view that it would not
be proceeding with a large part of the Bank[w]est Commercial Loan Book, and
that it would exact the cost of its exit from that loan book at the cost of
HBOS. It would do so by making provisions against the loan book, and by
impairing and provisioning the Bank[w]est Commercial Loan Book Customers
This process of intentional
reclassification meant that, in aggregate, there were at least 1,100 performing
loans provisioned and impaired from the commercial loan book and placed into
receivership. These loans included loans otherwise appearing on the Bank[w]est
good loan book.
Another submission stated that:
Hundreds of Bankwest commercial loan customers were
foreclosed upon by the CBA in the period from late 2009 through to (as late as)
2013, well after the sale settlement in July 2009. CBA would have the Senate
believe that this was merely as a result of a ‘book review’ (known as Project
Magellan) and that CBA had no clawback-type motive to wrongly force these
customers into default.
Commonwealth Bank's response to
allegations about the commercial loan book
The Commonwealth Bank provided information on the Bankwest commercial
loan book, which indicates that following its acquisition of Bankwest, the
number and value of commercial loans grew:
Table 7.1: Number of Bankwest commercial loans
30 Jun 2009
30 Jun 2010
Loan Balances ($m)
Number of Commercial customer
(31 Jan 2009)
Source: Commonwealth Bank, Answers
to questions on notice, taken on 1 December 2015, received on 24 December
Allegations relating to prudential
Allegations that loan impairments were related to attempts to meet
prudential requirements were also made:
At the time of the purchase, Bankwest was a Basel I
accredited bank, and Commonwealth Bank was the first bank to move to Basel II
advanced accreditation. So they had different capital profiles...Commonwealth
Bank were having difficulty raising capital during this period, so the solution
was to reduce the amount of customers that they had on the books.
...Bankwest was subject to the Bankwest act, which stopped
Bankwest from being moved up to the Basel II advanced accreditation. That could
not be moved up in line with Commonwealth Bank, which created a discrepancy of
capital profile between the two banks. The resolution of that was that they
could not raise the capital; therefore, they terminated the customers.
We have just had the financial services inquiry, where the
regional banks have put up their submissions, saying their cost of capital is
three times that of first tier banks like the CBA, and you can imagine a
Bankwest having a heavier loading of commercial loans and maybe having four or
five times the cost of capital because of the APRA requirements. The CBA
immediately in 2009, if you read their financial statements, tried to get
advanced accreditation for Bankwest so they could reduce its cost of capital.
What was in the way was that commercial loan book.
Commonwealth Bank's response to
allegations regarding prudential requirements
The Commonwealth Bank provided the following information in response to
the allegations regarding deliberate impairments in order to meet prudential
The Bank of Western Australia Act contains no provision
which refers to prudential regulation, regulatory capital nor Basel framework
accreditation – certainly nothing to stop Bankwest from applying to become
Basel II advanced accredited or raising capital.
The differing Basel regulatory capital treatments had no impact
on the management of individual customer accounts. There is no economic
incentive for the Group to recognise losses on Bankwest loans under either the
Basel I or Basel II capital regulations. Actually recognising losses means a
permanent loss of capital for the bank.
Allegations relating to project
The following allegation about project Magellan was made:
I have provided a folder of approximately 100 personal impact
statements from victims of 'Project Magellan' This code name was created by the CBA to
describe 'a review of our portfolio' that resulted in the mass impairments of
Bankwest commercial clients following the purchase of Bankwest by the CBA. It
is difficult to believe that this mass impairment was actually given a code
name but it is true.
A submitter made further allegations about the timing and role of
A further provisioning review ensued. This was code--‐named “Project
Magellan”. During Project Magellan, BankWest instructed valuers to revalue
customer’s loan security on a ‘worst--‐
case scenario’ to potentially trigger an LVR default.
As a result of Project Magellan, BankWest both provisioned
and impaired, and appointed Insolvency Practitioners to its customers loans in
the FY10 period to approximately 332 Performing Loans. This represented a
combined loan value of approximately $2.65 billion.
Commonwealth Bank response to allegations
relating to project Magellan
The Commonwealth Bank responded to the allegations, informing the
committee about what project Magellan was and how it started:
As unexpected losses continued to emerge from the Bankwest
commercial loan portfolio, it was decided that a thorough review needed to be
undertaken of loans, including ensuring that current independent valuations
were obtained to reflect the deteriorating property market. This was conducted
as part of Project Magellan, which commenced in April 2010 and resulted in a
significant increase in loan impairment expense. The purpose of Project
Magellan was to evaluate the adequacy of loan impairment expense for accounting
We commissioned an exercise to look at 47 per cent, by dollar
value, of all of the commercial books in Bankwest: We looked at 1,200 files to
make sure that they were properly classified and in order, basically. As a
result of that exercise, we set aside further collective and specific
provisions on accounts. That was an exercise to make sure, once and for all, we
had the correct provision.
The Commonwealth provide further information in Figure 7.1 on the level
of Bankwest accounting provisions for impaired loans and subsequent write-offs
over several years. Figure 7.1 shows the increase and decrease in impairments
and write-offs and indicates that there is a significant time lag between when
a loan book has a significant number of impairments and when write-offs
Figure 7.1 Bankwest provisions for loan impairment and
write-off in $million
Source: Commonwealth Bank, Tabled document, 2 December
ASIC comments on the Bankwest loan
ASIC informed the committee that when a loan book is purchased by
another financial institution, as was the case when the Commonwealth Bank
acquired Bankwest, the Commonwealth Bank assumed all the rights and obligations
for those loan contracts that Bankwest had established and, as a result, the
rights of the Commonwealth Bank to act in relation to those loans were limited
by the contracts that were in place with those borrowers. ASIC also indicated
Although ASIC has only received around 60 reports of
misconduct about this issue, what we have observed is that there is a variety
of borrowers in different circumstances. Some borrowers had loan facilities
that were not renewed by the Commonwealth Bank. The Commonwealth Bank was in a
position to decide not to renew loan facilities, even though perhaps those loan
facilities had been renewed previously. In other circumstances the borrowers
had missed repayments and, therefore, the Commonwealth Bank was simply
exercising the rights that it has under the contract to enforce those
The previous section discussed allegations put to the committee that there
was a deliberate strategy by the Commonwealth Bank to over-impair loans in
order to seek financial gain through a range of mechanisms. After considering
the evidence and responses it has received, the committee notes that despite
the significant spike in loan impairments, it has not been able to determine
that the impairment of loans was soley motivated by clawbacks or warranties.
While the contractual arrangements associated with the acquisition of Bankwest
may have played a role, the evidence before the committee points strongly to a
culture of placing profit and return to shareholders ahead of the interests of
The above allegations relate to whether there was a strategic,
management driven motive to impair loans to access clawbacks or warranties. The
committee notes an alternative possibility that the problems were caused in
part by motivations of bank officers driven by remuneration incentives that
cause them to be over optimistic when initiating loans. Senior management in
banks are responsible and should be held accountable for the conduct of bank
staff and their treatment of borrowers.
Motivation aside, the committee does however, remain concerned about
that the way these matters were handled which reinforces the need for the
recommendations that have been made in preceding chapters of this report.
The committee notes that the price adjustment mechanism created a
potential incentive for Bankwest, when owned by HBOS, to under-impair loans, to
make the loan book look better. This would have strengthened their claim for an
increase in the Bankwest sale price. As no allegations about this have been put
to the committee, the issue is simply noted here for completeness.
In proceeding with the price adjustment mechanism, both HBOS and the Commonwealth
Bank engaged the services of major accounting firms, KPMG and PWC respectively,
to conduct assessments of the levels of impairment of the Bankwest loan book. The
arbitration of provisions for impaired loans (also presumably based on the same
accounting standards) was carried out by Ernst & Young as the independent
expert. The fact that the three assessments differed by hundreds of millions of
would suggest that despite the same accounting and prudential standards being
used, identifying which loans were impaired and the extent of the impairment
was an uncertain process requiring commercial judgements in a significant
number of cases.
Even if there was no deliberate strategy by either HBOS or the Commonwealth
Bank to under or over-impair loans, the practical outcome was that a group of
up to 67 loans
were likely to have been in financial difficulty, yet the technical decision on
whether they were impaired may have been left undetermined for many months
throughout the sale negotiations and price adjustment process. For the affected
businesses, that elapsed time without action to address financial difficulties
possibly compounded their problem.
The above uncertainty on the level of loan impairments demonstrates and
quantifies the level of discretion that banks have in impairing loans. Such a
broad discretion must be subject to appropriate monitoring and accountability.
There are many loans for which the accountability is limited due to the lack of
an applicable dispute resolution scheme. A discussed in chapters 2, 3 and 4 the
committee is therefore recommending substantial improvements to dispute
resolution schemes, codes of practice and the regulation and monitoring of
This section summarises allegations put to the committee regarding ANZ's
acquisition of the Landmark loan book and ANZ's response to those allegations.
Landmark is a diversified rural merchandise business which, at the time
it was acquired by ANZ, was a division of the Australian Wheat Board. Landmark
Financial Services (LFS) was a division of Landmark that, at the time of its
acquisition by ANZ, provided agribusiness lending of about $2.4 billion, had
debenture (akin to deposit) accounts of about $300 million and had about 10,000
Allegations relating to ANZ's
acquisition of Landmark
The committee heard the following allegations in relation to ANZ's
acquisition of the
Landmark loan book:
ANZ decided to purchase the book debts of the AWB in these
various farming arrangements for about 16 per cent of the total value of the
capital of farms and securities to which they referred. From
a banking point of view it was a pretty good deal.
The difficulty then began for many farming families, because
they were resumed by enforcing security arrangements entered into nominally
with Landmark in some cases up to 22 years but then reduced to periods of two
months or five months, placing farmers in an impossible situation commercially.
Just imagine, if you had a 22-year loan as a small business, which is what a
farm is but with particular special circumstances, namely the prospect of
unanticipated drought, floods, market.
Another submitter alleged that the ANZ bank is currently defaulting
performing loans that it acquired when it purchased the 10,000 loans that
formed the Landmark loan book.
One submitter raised the following question:
...why would ANZ want to buy the Landmark loan book in March
2010, knowing that its customers were farmers, and then make representation to
those customers that ANZ was an agribusiness specialist to induce them to sign
a contract but then systemically put a considerable section of those customers
and their valuable viable businesses into forced liquidation almost immediately
after signing over?
Allegations regarding ANZ's involvement with Landmark as a purchaser of
securitised loans were also made:
...in the case of ANZ it looks as though they had become a very
significant securitised lender...it appears as if ANZ decided—its AWB loan
position was at risk—to emerge from the shadows, take front-line positions in
relation to lending operations to farmers direct, not through the AWB or
through Landmark. As a result, it was able to renegotiate terms of credit.
ANZ's response to allegations
ANZ responded to allegations regarding the purchase price of the
Landmark loan book, informing the committee that ANZ did not purchase Landmark
for 16 per cent of the value of the Landmark loan book. ANZ indicated that it
acquired the Landmark loan book at net book value after appropriate provisions
for approximately $2.2 billion and that the sale price for the Landmark deposit
book was also its book value of approximately $300 million. ANZ also provided
the following information:
We reiterate that ANZ aims to work with commercial customers
in default to help them get back on track. Less than 0.1 per cent of all
commercial customers are subject to ANZ enforced insolvency action.
It has been alleged that ANZ enforcement action has been
taken at short notice, but we are unaware of any case where this is correct.
Details of a number of customer matters have been provided on a confidential
basis to the Committee. These show that enforcement action is only taken after
negotiations with customers or attempts to negotiate with customers over a
period of time.
Claims that ANZ truncated long term loans to periods of two
to six months are incorrect. Customers in default are given time to sell down
assets to get back on track. It would appear that a six month deadline given to
sell an asset has been mistakenly construed as a truncated loan period.
ANZ also informed the committee that it considers that there may be some
confusion between loan impairment and contractual rights of recovery, so it
provided the following information for clarification:
Loan impairment is a financial accounting process that does not
give rise to any rights of recovery against a customer. An account can be in
default but not impaired, and vice versa; and
Impairment without contractual default may occur where an
assessment is made, for example, that a business is in decline and although the
customer has not defaulted, ANZ has formed a view that a loss will ultimately
ANZ also responded to allegations that it acquired Landmark to reduce
its securitisation exposure:
ANZ was a financier to the Australian Wheat Board (AWB), but
did not have a relationship with Landmark prior to the acquisition. ANZ and
Rabobank provided wholesale funding for the AWB/Landmark loan book under a
securitisation trust structure in which Permanent Custodians Limited (PCL)
acted as the trustee. ANZ’s component of the wholesale funding was around $1.1
billion. AWB and Landmark were the administrator/servicer under the trust,
which meant they were responsible for the day to day dealings with customers.
Whilst customers dealt with Landmark, their loan was legally offered by and
owed to PCL.
ANZ rejects Peter King’s evidence at the 16 February hearing
that the decision to purchase LFS was as a result of ANZ’s exposure as a
securitisation lender to the AWB. ANZ’s lending under the securitisation
funding was not a factor that influenced the transaction.
ANZ acknowledged that it had found some problems with the way it had
operated and that there are some individual customer matters where ANZ should
have managed issues differently, with more empathy, responded more quickly and
been more transparent:
I would like to acknowledge, having reviewed many of the 123
submissions to the inquiry—and, in more detail, the 11 related to ANZ
customers, of which five are related to Landmark—that there are some cases
where we should have done a better job of working with our customers. As well,
there have been examples where we could have done a better job of ensuring that
those who act as our agents or who are appointed by us—lawyers, receivers or
others—behave in a way that is acceptable to the bank and to our customers.
It is clear to me that, for some Landmark customers, we
should have done more to explain what ANZ's acquisition of the loan portfolio
meant to them...Most disappointing to me are the individual cases where we did
not meet the standards of customer support that I would expect of our bank.
Our experience of the Landmark acquisition has led us to
review our practices and introduce some new measures at ANZ...The staff have
greater flexibility to help good farmers manage their way through tough times.
The committee considered allegations regarding deliberate impairments or
defaults of performing loans associated with ANZ's acquisition of Landmark.
After considering the evidence and responses it has received, the committee has
not been able to conclusively determine that this occurred. As with the
Bankwest evidence, motivation aside, the committee is concerned at the way many
of these matters were handled and that the extant system of checks and balances
appears incapable of providing protection or redress to small business
customers. The committee welcomes ANZ's acknowledgement that its treatment of
customers could be improved and that it is now implementing better practices.
The committee will follow with interest developments in ANZ's approach to
resolving issues with customers and encourages all lenders to take an open and
constructive approach to helping borrowers resolve their difficulties, especially
in light of the significant power imbalance that may exist between lenders and
The committee also notes action taken by the ANZ¾without admission of regulatory breach¾to significantly improve the financial circumstances of some
customers with whom they have been in dispute. This leads the committee to
The decision by ANZ implies that they recognise that the extant
system of checks and balances is inadequate to protect small business customers
and to ensure a fair and transparent relationship with the bank and that
unilateral action by them is the best way to rectify their previous¾possibly unintentional¾abuse of the power they hold;
Other lenders should engage independent experts to critically
examine contentious cases to determine what, if any, restitution may be
appropriate in the light of the standards developed by the ASBFEO; and
That funding be provided to ASBFEO¾acting
as a tribunal¾to consider legacy cases
in the event that lenders do not choose to examine contentious cases as
The committee recommends that:
should engage independent experts nominated by the Australian Small Business
and Family Enterprise Ombudsman to critically examine contentious cases to
determine what, if any, restitution may be appropriate in the light of the
standards developed by the Australian Small Business and Family Enterprise
Ombudsman with particular regard to unconscionable conduct; and
funding through a user pays industry funding model be provided to Australian
Small Business and Family Enterprise Ombudsman ¾acting as a tribunal¾to
consider cases retrospectively in the event that lenders do not choose to
voluntarily examine contentious cases as recommended above.
Senator David Fawcett
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