Understanding the ING prudential reporting failure

ING Australia’s liquidity failure sounds technical, but the underlying concept is straightforward: a bank must always be able to find enough cash to meet withdrawals and other payments when they fall due.

That is what liquidity means. A bank can be profitable and have assets worth more than its liabilities, yet still fail if too much of its money is tied up in mortgages and other loans that cannot quickly be converted into cash. The global financial crisis demonstrated how quickly confidence and wholesale funding can disappear, leaving apparently solvent banks exposed.

After the 2008 crisis, international regulators developed what is called the Liquidity Coverage Ratio, or LCR, as part of international reforms. Australia introduced the LCR requirement from 1 January 2015. It requires larger and more complex banks to hold enough high-quality liquid assets — principally cash, Reserve Bank balances and highly liquid government securities — to meet their estimated net cash outflows during 30 days of severe financial stress.

The calculation is essentially:

High-quality liquid assets ÷ stressed 30-day net cash outflows = LCR

An LCR of 100 per cent means the bank has just enough qualifying liquidity to cover the modelled stress. APRA normally requires an LCR bank to remain at or above 100 per cent.

That makes the ING failure remarkable.

ING Bank (Australia) Limited is an Australian authorised deposit-taking institution and part of the global ING Group.

It is not treated by APRA as a simple, unsophisticated bank. ING is one of only six Australian banks currently accredited to use the internal ratings-based approach to calculate credit-risk capital requirements, alongside the four major banks and Macquarie. APRA says such accreditation requires sophisticated risk management and subjects banks to more intensive prudential supervision. ING received its initial internal-model accreditation in 2018.

That accreditation does not certify ING’s liquidity calculations, but it makes the control failure particularly striking.

ING told APRA in July that it had materially miscalculated its liquidity position for several years. The bank had been reporting LCRs of around 160 per cent — apparently a very substantial buffer above the regulatory minimum. APRA says the true ratio was significantly lower and at times fell below 100 per cent. APRA has not yet publicly identified the precise calculation mistake.

APRA’s response reflects the seriousness of the failure. It has imposed licence conditions, increased ING’s minimum liquidity requirement and imposed a $50 million operational-risk capital add-on. ING must commission independent reviews into the causes of the liquidity failure and its broader risk management and governance, prepare a remediation program and obtain independent assurance that the problems have been fixed. These measures remain until APRA is satisfied.

APRA says ING remains financially resilient. The prudential issue is nevertheless fundamental: a sophisticated bank spent years believing one of its most important safety buffers was substantially stronger than it really was.