CHAPTER 5
THE MANAGEMENT OF THE BANK GROUP'S DIVERSIFIABLE CREDIT RISK

 

 

TABLE OF CONTENTS

5.1 INTRODUCTION
5.1.1 THE PURPOSE OF THIS CHAPTER
5.1.2 SUGGESTIONS THAT THE LOAN PORTFOLIO INVOLVED A CONCENTRATION OF CREDIT RISK
5.1.3 THE "INDEPENDENCE" OF THE BANK AND BENEFICIAL FINANCE CORPORATION
5.1.4 RELEVANCE TO THE INVESTIGATION
5.1.5 THE PLAN OF THIS CHAPTER
5.1.6 INFORMATION SOURCES

5.2 THE BANK GROUP'S CLIENT EXPOSURES
5.2.1 RESERVE BANK GUIDELINES
5.2.2 THE BANK'S CLIENT EXPOSURES
5.2.2.1 The Bank's Prudential Policies
5.2.2.2 Monitoring of the Bank's Large Exposures
5.2.2.3 The Bank's Management of its Large Exposures
5.2.3 BENEFICIAL FINANCE CORPORATION'S CLIENT EXPOSURES
5.2.3.1 Beneficial Finance Corporation's Prudential Policies
5.2.3.2 Monitoring of Beneficial Finance Corporation's Large Exposures
5.2.3.3 Beneficial Finance Corporation's Management of its Large Exposures
5.2.4 THE IMPACT OF BENEFICIAL FINANCE CORPORATION'S LARGE EXPOSURES ON THE BANK
5.2.5 SUMMARY

5.3 THE BANK GROUP'S INDUSTRY EXPOSURES
5.3.1 THE BANK'S INDUSTRY EXPOSURES
5.3.1.1 The Bank's Prudential Policies
5.3.1.2 Monitoring the Bank's Industry Exposures
5.3.1.3 Management of the Bank's Industry Exposures
5.3.2 BENEFICIAL FINANCE CORPORATION'S INDUSTRY EXPOSURES
5.3.2.1 Beneficial Finance Corporation's Prudential Policies
5.3.2.2 Beneficial Finance Corporation's Monitoring of Industry Exposures
5.3.2.3 Management of Beneficial Finance Corporation's Industry Exposures
5.3.3 THE IMPACT OF BENEFICIAL FINANCE CORPORATION'S EXPOSURES UPON THE BANK
5.3.4 SUMMARY

5.4 THE BANK GROUP'S GEOGRAPHIC EXPOSURES
5.4.1 SIGNIFICANCE OF THE GROUP'S GEOGRAPHIC EXPOSURES
5.4.2 THE PRUDENTIAL POLICIES OF THE STATE BANK AND BANK GROUP
5.4.3 REPORTING OF GEOGRAPHIC EXPOSURES
5.4.4 SUMMARY

5.5 MONITORING GROUP-WIDE CREDIT RISK
5.5.1 THE EVOLUTION OF GROUP RISK MANAGEMENT
5.5.2 GROUP RISK MANAGEMENT DIVISION
5.5.3 SUMMARY

5.6 CONCLUSIONS AND FINDINGS
5.6.1 CONCLUSIONS

5.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
5.7.1 TERMS OF APPOINTMENT A
5.7.2 TERM OF APPOINTMENT C
5.7.3 TERM OF APPOINTMENT D

5.8 APPENDIX: CHRONOLOGY OF EVENTS AND POLICIES RELATING TO THE MANAGEMENT OF THE CONCENTRATION OF CREDIT RISK

 

 

 

5.1 INTRODUCTION

 

5.1.1 THE PURPOSE OF THIS CHAPTER

In public statements by the State Bank and the Treasurer on 10 February 1991 outlining the financial position of the Bank and Bank Group in respect of which I am to report, it was said that the financial position of the Bank and the Bank Group was "almost entirely" due to the "property and corporate sectors" of the Bank Group, particularly of the Bank itself, and Beneficial Finance Corporation Limited ("Beneficial Finance Corporation"). The Bank stated that:

"The weaknesses that have now been exposed did not develop recently. They are a legacy of the Group's entry into wholesale lending markets at a time of continually rising asset prices in the second half or the 1980s. The risk profile of the Group was, in hindsight, unwise, but this was disguised by the benign economic conditions of the day."

The "risk profile" of a financial institution depends to a great degree, on the focus of the loan portfolio upon particular borrowers, particular industries, or particular geographic areas;the nature of the focus (or focuses) makes (or make) important contributions to the "diversifiable" credit risk of the portfolio.

Diversifiable credit risk is that credit risk which can be reduced, or even eliminated, by the adoption of prudential policies calculated to ensure that the loan portfolio does not involve a concentration of risk - that is, that the loan portfolio does not include excessively large loans to particular borrowers and is not excessively concentrated upon particular industries, or upon particular geographic areas. As stated by the Reserve Bank of Australia in Prudential Statement A1, "Prudential Supervision of Banks":

"Undue concentration of risk can expose a bank to losses and diminution of capital. A bank can reduce risk by working towards, and maintaining, a deposit book and loan portfolio that are diversified both geographically and industrially. Banks generally impose limits on the amounts of funds they will accept from or advance to, any one client or group of related clients to reduce the degree of risk."

This Chapter of the Report describes how the State Bank and Beneficial Finance Corporation monitored and managed that particular aspect of the credit risk profile of their loan portfolios during the period under review. It examines the question whether, and to what extent, the financial position of the Bank and Bank Group, reported by the Bank and the Treasurer on 10 and 12 February 1991, was caused by lending too much to particular borrowers, or by an excessive exposure to particular industries (such as commercial property development) or to particular geographic areas.

There are, of course, other determinants that contribute to the Bank Group's "risk profile", including the credit risk associated with particular loans (non-diversifiable credit risk), and risks associated with the Group's funding (interest rate and liquidity risks). The Bank's and Beneficial Finance Corporation's management of these risks is examined in other Chapters of this Report (refer particularly to Chapters six to fourteen) regarding the Bank. A later Report will examine these matters in more detail in connection with Beneficial Finance Corporation.

5.1.2 SUGGESTIONS THAT THE LOAN PORTFOLIO INVOLVED A CONCENTRATION OF CREDIT RISK

An examination of the Bank Group's management of diversifiable credit risk has been essential because of a number of suggestions that the nature of the exposures in the loan portfolios of the Bank and Beneficial Finance Corporation were a significant contributing factor to the losses realised by the Bank Group.

The Bank's 1991 Annual Report, for example, described the level of the Group's exposure to the finance and property sectors as representing "a substantial imbalance in the Group loan portfolio", and attributed more than 77 per cent of the Group's non-accrual exposures to its exposures to the finance, property, and construction, industries. The Annual Report identified as one cause of the Bank's problem loans, the "heavy concentration of risk" in the commercial property sector.

The 1991 Annual Report of Beneficial Finance Corporation cited the "unprecedented fall in property values throughout Australia" as a principal cause of the company's poor performance, noting that property "formed a significant proportion of the company's business."

A Reserve bank Diary Note of a prudential consultation meeting with officers of the State Bank in November 1988 records that the Reserve Bank expressed "some concern" regarding the "increased involvement in property development financing" by both the State Bank and Beneficial Finance Corporation.

JP Morgan, which was engaged, in February 1991, to review aspects of the Bank Group's operations, suggested (although without providing details) that the loan portfolio involved an excessive concentration of risk. In its report regarding a Group Restructuring Plan, JP Morgan recommended that:

"SBSA should develop a strategy to diversify the inordinate concentration of risk that exists in its current portfolio. There are three basic aspects to this concentration. First, exposures to many individual borrowers represent an unduly high percentage of SBSA's capital and reserves. Secondly, the Group has very substantial exposures to certain industries or markets. Thirdly, SBSA has a high concentration of risk in South Australia."

5.1.3 THE "INDEPENDENCE" OF THE BANK AND BENEFICIAL FINANCE CORPORATION

As explained in Chapter 3 - "Overview of the State Bank and of the State Bank Group", detailed examination of the Bank Group's activities has been limited to the Bank and Beneficial Finance Corporation, as the two corporations which incurred the overwhelming majority of the Group's losses.

In Chapter 4 - "Direction-Setting and Planning" of this Report, - the relationship between the Bank and its subsidiary groups was described as one of "co-operative independence".() Although the Bank ensured that it controlled its various subsidiary groups by appointing its representatives to the subsidiaries' Boards of Directors, and there were arrangements to promote communication and co-operation at the management level, the subsidiaries set their own strategic and business objectives, and set their own internal operating policies. At its meeting on 22 June 1989, in considering alternatives for the appointment of Directors to the Boards of subsidiary companies, the Bank Board "considered that the Boards (of subsidiaries) should remain independent and have outside Directors appointed, with the Bank continuing to maintain adequate control mechanisms." ()

The policies which were established independently by the Bank and by Beneficial Finance Corporation included those prudential policies that related to the concentration of credit risk in their respective loan portfolios. The Bank's policies initially related only to its own exposures, and were not drafted in terms which required any reference to the loan exposures of Beneficial Finance Corporation. It was the responsibility of the Board of Directors of Beneficial Finance Corporation to establish prudential policies to apply to that company's risk exposures. As described below, it was not until 1990 that the Bank's Board of Directors settled prudential policies which applied to the Bank Group's exposures, determined on a Group-wide basis.

Although the subsidiaries of the Bank operated as semi-autonomous businesses, there was one respect in which they had the potential to affect the Bank profoundly - whatever the legal position, the Bank would act to meet a subsidiary's liabilities and obligations should the subsidiary itself be unable to do so.

While the Bank did not provide any formal guarantee of Beneficial Finance Corporation's obligations, it is beyond doubt that the Bank would not allow a wholly-owned subsidiary to fail. As noted in the Bank's 1990 Annual Report, the Bank was "totally committed to maintaining full support for Beneficial." The prudential credit risk management policies established by the Beneficial Finance Corporation Board, therefore, had the capacity to directly affect the Bank, which was commercially committed to supporting its subsidiary. The Bank's advance of funds in respect of the East End Market commitments of Beneficial Finance Corporation, (a matter that will be examined in a later Report), and its purchase of non-performing assets from Beneficial Finance Corporation in the 1991 financial year, are particular manifestations of that commitment.

In this regard, it should be noted that the Bank Group apparently adopted a guideline which limited the size of Beneficial Finance Corporation relative to the Bank. It was noted in Chapter 4 - "Direction-Setting and Planning", that the Bank's 1985 strategic plan proposed the establishment of limits on the size of subsidiaries:

". Beneficial Finance; receivables no greater than 20% of total bank assets;

. Other subsidiary operations no greater than 10% (total) of total bank assets".

I have found no evidence that the Bank's Board of Directors formally considered or imposed any such limits. The limit, however, is expressly referred to in the minutes of the Beneficial Finance Corporation Board of Directors' meeting held on 30 April 1985:

"Future plans to be produced on the basis of sales which can be written even though this may increase Company assets above the guideline of 20% of SBSA assets. Any excess receivables can then be sold off to SBSA or other sources." ()

The policy of the Bank in respect of its management of the risk represented by the activities of Beneficial Finance Corporation was broadly in accordance with the prudential guidelines of the Reserve Bank. Before August 1989, the Reserve Bank did not require that the large exposures of non-banking subsidiaries of a bank be reported. Instead, Reserve Bank Prudential Statement G1 required banks to ensure that a subsidiary had "sound and prudent management which is aimed at achieving undoubted viability within the capital resources of the (subsidiary) itself", and to ensure that the "size of its subsidiaries does not become unduly large relative to the bank itself". The Reserve Bank's guideline was that the total assets of all subsidiaries should together not exceed 50 per cent of a bank's own assets.()

Nevertheless, the eventual extension of the Bank's policies to include Beneficial Finance Corporation's exposures, and the implications of the policies of the two corporations for each other's businesses, requires that the management of diversifiable credit risk by the Bank and Beneficial Finance Corporation be examined together.

5.1.4 RELEVANCE TO THE INVESTIGATION

An examination of how the Bank and Beneficial Finance Corporation set policies to control diversifiable credit risk, and monitored and managed that risk, is relevant to Terms of Appointment A(a) which directs me:

"... to investigate and inquire into and report on:

(a) what matters and events caused the financial position of the Bank and the State Bank Group as reported by the Bank and the Treasurer in public statements on 10th February 1991 and in a Ministerial Statement by the Treasurer on 12th February 1991;"

An examination of the implementation and monitoring of compliance with those policies is relevant to Term of Appointment C, which directs me:

"... to investigate and inquire into and report, with reference to the above matters, whether the operations, affairs and transactions of the Bank and the Bank Group were adequately or properly supervised, directed and controlled by:

(a) the Board of Directors of the Bank;

(b) the Chief Executive of the Bank;

(c) other officers and employees of the Bank;

(d) the Directors, officers and employees of the members of the Bank Group."

It is also relevant to Term of Appointment D by which I am required:

"... to investigate and inquire into and report, in relation to the matters set out in paragraphs A and B above, whether the information and reports given by the Chief Executive Officer and other Bank officers to the Board of the Bank:

(a) were under all circumstances, timely, reliable, and adequate;

(b) sufficient to enable the Board to discharge adequately its functions under the Act."

5.1.5 THE PLAN OF THIS CHAPTER

This Chapter examines the following matters:

Section 5.2: Examines the management of the Bank's and Beneficial Finance Corporation's large credit exposures to particular clients and client groups. The Section describes the prudential guidelines of the Reserve Bank in respect of large credit exposures, and examines the prudential policies, monitoring, and management, of the Bank's and Beneficial Finance Corporation's large client exposures, and the impact of the exposures of Beneficial Finance Corporation upon the Bank Group.

Section 5.3: Examines the prudential policies, and the management and monitoring of the Bank's and Beneficial Finance Corporation's credit exposures to particular industries, particularly commercial property acquisition and development.

Section 5.4: Describes the significance of the Bank Group's geographic exposures as an aspect of the credit risk associated with the loan portfolio.

Section 5.5: Describes the actions taken by the Bank to implement an effective system for monitoring and managing risk on a Group-wide basis, rather than the individual company and division basis which is applied before 1989.

Section 5.6: Contains the Conclusions and Findings.

5.1.6 INFORMATION SOURCES

Listed below are the documentary sources examined in relation to the management of the concentration of credit risk in the loan portfolio:

(a) Transcript of Proceedings, Jacobs Royal Commission.

(b) Transcript of Proceedings, Auditor-General's Investigation.

(c) State Bank of South Australia Board Meeting Minutes and Papers for the period 1984-1991.

(d) State Bank of South Australia Executive Committee Meeting Minutes and Papers for the period 1984-1991.

(e) Submissions from relevant parties.

(f) Selected correspondence between the Bank and the Reserve Bank of Australia.

(g) Diary Notes prepared by officers of the Reserve Bank of Australia.

(h) Various internal memoranda prepared by management of the State Bank of South Australia.

(i) Copy of the statement by Mr D W Simmons to the House of Representatives Standing Committee on Finance and Public Administration - Australian Banking Industry Inquiry. (This copy was provided to me by Mr Simmons).

(j) State Bank of South Australia Quarterly and Monthly Operating Reviews.

(k) Beneficial Finance Corporation Board Meeting Minutes and Papers for the period 1984-1991.

(l) Beneficial Finance Corporation Monthly Operating Reports.

 

5.2 THE BANK GROUP'S CLIENT EXPOSURES

 

5.2.1 RESERVE BANK GUIDELINES

The management of the Bank's and Beneficial Finance Corporation's client exposures needs to be considered in relation to the Reserve Bank's prudential guidelines, which appear to have significantly influenced the approach of those corporations to this issue.

The Reserve Bank issued a Prudential Statement, and provided guidelines, regarding the size of a bank's credit exposures. Prudential Statement E1, "Supervision of Banks' Large Credit Exposures", first issued in June 1986, required banks to provide to the Reserve Bank a statement of their policies regarding large exposures to individual clients or groups of related clients, and to report quarterly all exposures above 10 per cent of a bank's shareholders' funds. The Statement provided that:

"... any bank which has any exceptionally large exposures or a large number of exposures of more than 10 per cent of shareholders' funds ... should be able to show that excessive risks are not being undertaken."

In a letter to Mr T M Clark, dated 6 May 1986, the Reserve Bank stated that it expected that a bank's maximum exposure to any individual client or client group would be limited to between 25 and 30 per cent of the Bank's shareholders' funds, and that:

"... no exposure to a non-bank, non-government client, or group of related clients, would exceed 30 per cent of shareholders' funds ... other than in the most exceptional circumstances."

In 1987, Prudential Statement E1 was amended to require prior notification of a bank's intention to enter into an "exceptionally large exposure", meaning an exposure of more than 30 per cent of the bank's shareholders' funds.

The Reserve Bank also provided guidance as to what constituted a "client group" for the purposes of measuring large exposures. In the instructions for completion of the quarterly Large Exposures Return, banks were directed to:

". add exposures to a parent or holding company to those of its subsidiaries, unless exposure to a subsidiary specifically or unequivocally involves non-recourse to the parent. (A subsidiary is defined to involve greater than 50 per cent ownership);

. treat as a single risk, exposures to companies linked by cross-guarantees, common ownership, ability to control or other factors which in your bank's assessment identify the companies as related."

It is important to note that, until August 1989, Prudential Statement E1 applied only to the large exposures of the banks themselves (and their banking subsidiaries). As noted above (Section 5.1.3), the Reserve Bank's approach to controlling the risk presented to a bank by its subsidiaries was to require banks to ensure that their subsidiaries had sound and prudent management, and did not become unduly large relative to the bank itself.

In August 1989, the Reserve Bank changed Prudential Statement E1 to extend its terms to include all of the exposures of a bank group, including those of non-banking subsidiaries. The new policy required that banks report all exposures of the consolidated bank group which exceeded 10 per cent of the "capital base of the consolidated group".

The revision to Prudential Statement E1 involved two other changes:

(a) First, the measure of capital for large exposure reporting purposes was changed from "shareholders' funds" to "tier 1 and tier 2 capital". This had the effect of significantly increasing the capital of the Bank for the purpose of large exposure reporting by including, among other things, subordinated loans.

(b) Second, the instructions regarding the determination of a client "group" were changed to include a control test:

"Treat as a single risk, exposures to companies linked by cross guarantees, common ownership, ability to control or other factors which in your bank's assessment identify the companies as related." ()

5.2.2 THE BANK'S CLIENT EXPOSURES

5.2.2.1 The Bank's Prudential Policies

As is described in detail below, the essential features of the prudential policies of the bank regarding maximum client exposures were:

(a) The Bank's policies applied only to the Bank's own credit exposures, and did not extend to include those of Beneficial Finance Corporation (or other subsidiaries). It was not until October 1990 that the Bank's Board of Directors settled and implemented a Group "large credit exposure" policy.

(b) The credit exposure limits were established by reference to the Bank's capital base. Accordingly, as the Bank's capital increased over the period under review, so did the amount that the Bank could lend to a client or client group within the limits of its prudential policy.

(c) Until October 1989, the basic policy was that the exposure to any client or client group was to be limited to an amount equal to 20 per cent of the Bank's capital base. For the purpose of calculating this limit, the capital base used was the Bank's own capital, adjusted to exclude the capital of subsidiaries, and excluding loan capital from the Government. The general exposure limit was expressed as a dollar amount which was increased from time to time as the Bank's capital increased. Being calculated on the basis of the Bank's own capital excluding loan capital, the dollar limit diminished as a proportion of total capital. In July 1987, the dollar amount set ($60.0M) was only 10 per cent of the Bank's capital:

Date	Basic Exposure Limit $M	Projection of Adjusted Capital Per Cent	Proportion of Total Bank Capital Per Cent
July 1984	28.0	20.0	16.9
Unknown	30.0	-	-
February 1985	33.0	19.1	17.0
July 1985	40.0	20.1	11.8
July 1987	60.0	10.3	9.9

(d) The general exposure limit, was, however, subject to two exceptions, both requiring approval of the Board of Directors:

(i) first, the Board was prepared to consider and approve exposures exceeding the general limit for "blue chip" corporate groups, up to an absolute maximum limit of an amount equal to 30 per cent of the Bank's capital; and

(ii) second, the Board would consider proposals for exposures in excess of the prudential limits, on the basis that the exposure could be sold down to within prudential limits within six months.

(e) In October 1989, the policy was stated in terms solely of a maximum exposure limit of 30 per cent of the Bank Group's consolidated capital base. The limit was stated in dollar terms as $250.0M, which was about 19 per cent of the Group's consolidated capital base (including subordinated loans).

The Board established the new Bank's policy regarding maximum client exposures at its meeting on 26 July 1984:

"Exposure, both actual and contingent, to any one entity, not to exceed 20% of the capital base of the Bank at any time, excluding the public sector." ()

The paper supporting this proposal observed that this limit would allow exposure of $28.0M to any one client or client group.

A client group was to include all borrowers subject to common control:

"In assessing whether an associated or related account falls within a "group", the determining factor ... is whether or not that account is subject to the control of another entity. Control, by our definition, is broadly defined as the ability to give direction to management." ()

In February 1985, the Board was asked to approve a more aggressive large exposure policy. The Board Paper supporting the new policy cited "practical" and "competitive" considerations in support of the change:

"The very nature of this exposure limit put in place for prudential purposes requires a strongly conservative attitude. It is, however, considered that we must give due cognizance to both practical and, to a lesser extent, competitive pressures in deciding our policy and be prepared to review its impact, as is necessary, to protect both our position in the market place and the viable soundness of our corporate base." ()

The new policy - which was approved by the Board of Directors - did not involve any change to the basic policy of a general limit of 20 per cent of capital (although the dollar limit was increased to $33.0M "in line with our current capital base"). The new policy did, however, involve two important changes.

First, it empowered the Board to consider exposures in excess of the 20 per cent limit:

"The Board would consider a higher level of exposure to a maximum of 30% of shareholders' funds ($50m) for `blue chip' corporate groups, i.e. as a general rule this would apply to those top Australian corporates enjoying a credit rating of AA or better;

The Board would consider proposals for the Bank to take on corporate risk on the basis that the risk can be sold down to place exposure within prudential guidelines within a period of six months. In this instance, a dollar figure was not proposed so as to allow any proposal of merit to be submitted to the Board;

The Board would allow Management to submit proposals of an exceptional nature, which fall outside prudential guidelines, when it is considered there are benefits and extenuating factors that warrant a "one-off" decision." ()

Second, the definition of a client "group" was changed to remove the reference to the test of control based on the ability to give direction to management. Borrowers were to be considered to be part of a "group" only where there was 40 per cent or greater ownership of one borrower by the other.

The policy regarding the determination of a "group" was apparrently subject to an undocumented "stand-alone" exception. According to a Reserve Bank Diary Note of a meeting of the Reserve Bank, on 12 September 1986, with State Bank managers, including Mr Clark, Mr K S Matthews and Mr J T Hazel, the Chief Manager Corporate Banking, Mr D C Masters, commented that an exception to the group exposure policy occurred "... if a transaction stands alone with no recourse to the ultimate parent and if it is fully secured." ()

This exception, which is basically consistent with the Reserve Bank's own instructions for defining a group, did not form part of the submission to the Bank's Board, was not documented in the credit policy manuals, and was apparently never approved by the Board. Nevertheless directors approved loans on the basis of this "stand-alone" exception. For example, a report of the Bank Group's large exposures provided to the Board, in August 1990, disclosed that the Bank's total exposure to the Adsteam Group was $426.0M, including a "stand-alone" exposure to a member of the Adsteam Group of $150.0M The Corporate Banking manual issued two months later stated that the maximum exposure to a client group was $250.0M. The Bank's exposure to the Adsteam Group is examined in detail in Chapter 9 - "Case Study in Credit Management: The Adsteam Group".

On 25 July 1985, the monetary limit was restated as being $40.0M "before proposals are submitted to full board for consideration on a "one-off" basis." () That amount was stated to be 11.8 per cent of the Bank's capital, as at 30 June 1985 of $340.0M, including loan capital. If that "loan capital" is excluded, as the Bank did for large exposure reporting purposes, the $40.0M actually represents 20.1 per cent of the Bank's capital.

At its meeting on 23 July 1987, the Board approved a Management proposal for further increases in the dollar value of the prudential limit of maximum client exposures. The Board Paper stated, by way of background, that:

"The Reserve Bank of Australia has established loan exposure reporting arrangements and indicative guidelines which broadly define their expectations of Banks in respect of exposure limits. The preferred maximum exposure to a single entity is a sum not exceeding 10 per cent of the lender's capital resources; however, higher exposures may be undertaken, subject to prior notice of any exposure to an entity or group exceeding 30 per cent of capital resources." ()

Management recommended, and the Board approved, dollar limits to the Bank's exposures in line with the Reserve Bank guidelines. A dollar limit was established which represented about 10 per cent of the Bank's capital:

"The general maximum exposure to any corporate entity or group be $60m, provided that where in the opinion of Corporate Banking the financial strength of an entity or group warrants a higher level, applications carrying the recommendation of Lending Credit Committee may be submitted to the full Board." ()

The maximum exposure of the Bank was limited to 30 per cent of the Bank's capital base:

"In line with the Reserve Bank's prudential recommendations as to exposure levels, Management proposed that 30% of capital resources be adopted as the absolute maximum exposure, but more particularly as follows -

	Maximum exposure, both direct and contingent
To a single entry	$100m
To a group of companies, where single entities within the group have individual limits	$150m

" ()

The Corporate Banking Manual, updated in October 1989, expressed the policy for the first time, in terms of the consolidated group. The Manual stated the Bank's large exposure policy simply in terms of the absolute 30 per cent limit, with no reference to the general limit:

"Maximum exposure to any single corporate entity is 30% of the Bank's Consolidated Shareholders' Funds (assessed risk, direct and contingent).

In exceptional circumstances, applications may be submitted to full Board for limits to a single entity exceeding this maximum exposure but in any case not exceeding $250M.

Where the Bank provides facilities to a group of companies, in which single entities within the Group have individual limits, then the maximum of the combined facilities may not exceed $250M." ()

The amount of $250.0M is, in fact, about 19 per cent of the Bank's consolidated capital base inclusive of subordinated debt, as at 30 June 1989, and is about 30 per cent of consolidated capital excluding subordinated debt. There is no record of the new, significantly increased, monetary limits having been reviewed or approved by the Board.

The policy described in the Manual was apparently intended to apply to the large credit exposures of the Bank Group. In August 1989, the Reserve Bank had extended Prudential Statement E1 to apply on a group-wide basis, and the minutes of the Beneficial Finance Corporation Board of Directors' meeting held on 31 August 1989, at which a report on Beneficial Finance Corporation's large exposures was reviewed, record that:

"Mr Baker and Mr Matthews are to have liaison with regard to the State Bank prudential limits affected by the report, as well as the general content to meet RBA requirements ... Mr Matthews advised the meeting that through Mr Chris Guille, Group credit parameters would be set soon." ()

The Bank's Board of Directors did not, however, approve a Group-wide prudential policy until October 1990, when Mr S G Paddison, Chief General Manager Australian Banking, presented a paper to the Board which proposed the adoption of credit limits to be applied by the Bank Group - as opposed to the Bank itself - for each client or client group. The supporting paper stated that:

"Customer risk concentration must be controlled once its aggregate becomes significant in the context of Group capital resources and/or credit exposures can be separately originated by two or more Bank divisions/subsidiaries." ()

The Board of Directors resolved to approve that:

"A system of Prudential Customer Exposure Ceilings [PCEC] be adopted to control Group credit risk concentration at the individual customer or customer group level. A PCEC be required once desired Group aggregate exposure for a customer reaches $50m or more or in specified circumstances for a lesser amount.

PCECs for aggregate amounts of $70m or more would require approval by the Board of Directors.

The foregoing initial threshold amounts of $50m and $70m would be periodically reviewed in relation to the Group's prevailing capital resources." ()

Prudential Customer Exposure Ceilings were to be established on a Group-wide basis by the division or subsidiary principally involved with the client, with sub-allocations of the overall limit is being made to other divisions or subsidiaries which dealt with the client. The Prudential Customer Exposure Ceiling was to quantify the maximum level of credit exposure that the Bank Group was willing to extend to a particular client. In this way, it was to be an "anticipatory limit" which would accommodate both present and future levels of exposure.

5.2.2.2 Monitoring of the Bank's Large Exposures

Until 1989, the reported large exposures of the Bank included only the exposures of the Corporate Banking division. The measurement and reporting of large exposures did not include those of the Bank's subsidiaries,or extend to include the exposures of the Bank's own divisions, other than the Corporate Banking division. As the Bank's Chief General Manager, Mr Matthews reported to the Executive Committee in August 1988, the Bank did "not have any mechanisms to accurately assess our total exposure as a Bank or a Group to any one individual, business entity, industry, region or country." ()

Similarly, the Bank's Group Internal Audit department reported, as late as October 1990 (in its Group Audit quarterly summary, presented to the Board), that:

"It was noted that no co-ordination or adequate communication is taking place between the various sections of the Group regarding the Bank's overall security and limit of exposure in relation to customers obtaining loans from various sections of the Bank/Group.

Circumstances noted were SBSA Corporate, Retail Banking, Commercial and Private Banking sections and Beneficial Finance are independently financing the same customers or groups with no Bank-wide/Group limit of exposure.

It was noted that various sections in the Bank are independently assessing the customers' financial position and loan repayment capabilities without taking into account his commitment on other exposures within the Bank/Group.

We have come across a situation where it appeared that assets currently financed by personal loans from Beneficial Finance are relied upon by the Bank for security purposes, thus creating double exposure for the Group." ()

This limitation of the Bank's measurement of its own large exposures, while unsatisfactory, is most unlikely to have had any significant implications for the Bank's compliance with its maximum exposure limits. I have reviewed a schedule of the Bank Group's credit exposures of more than $20.0M to client and client groups as at 30 June 1989, which includes the exposures of all Bank divisions.() In no case was the exposure of those divisions other than Corporate Banking significant in terms of the total exposure, or result in the total exposure exceeding the prudential limit. In the course of my Investigation, I have not identified any large exposures of the Bank that were materially understated because they included only the exposures of the Corporate Banking division. The individual exposures of Corporate Banking were by far the most significant of the Bank in terms of the magnitude of credit risk.

The basis for the Bank's recording and monitoring of its large credit exposures was a Commitment Register that was maintained by the Corporate Banking division from July 1984 until February 1990, when it became the basis for the establishment of a group-wide management information system. The Commitment Register was the main source of client information for the account managers in Corporate Banking, and was used as the basis for recording most details of corporate loans, including client exposures, approved limits, industry classification and the nature of security.

The Bank's Board of Directors did not receive regular reports of the Bank's large exposures, or of the compliance of those exposures with the Bank's policies, before 1989. This information was not regularly included in the monthly or quarterly operating reviews provided to the Bank's Board. The Bank did, however, prepare quarterly Large Exposure Reports for the Reserve Bank, which included all Corporate Banking exposures in excess of 10 per cent of the Bank's capital. The Bank informed me, in answer to a question, that the information included in these Reserve Bank reports was provided to the Bank's Board on a quarterly basis(), as part of the monthly operating review for each of the months following the quarter end, but a review of the monthly operating reviews discloses that information regarding large exposures was included only twice, in April 1988 and July 1989. That information included only the exposures of the Corporate Banking division.

The principal source of information available to the Board regarding large exposures was the credit proposals submitted to the Board for approval of significant loans (the Bank's system of delegated lending authorities is described in Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms"). These submissions to the Board contained information on the existing and proposed exposure to the particular client. Accordingly, the Lending Credit Committee and the Board were able to identify the level of particular exposures, and any potential breaches of the Bank's policy guidelines on client and client group exposure, at the time at which they were asked to approve a proposal. Again, however, the information was usually limited to Corporate Banking exposures.

In July 1986, a management document titled "Proposed Format and Guidelines for Submissions to the Lending Credit Committee" () was issued. This required that all existing facilities for the particular client under consideration, including those advanced by Beneficial Finance Corporation and a "Group Exposure" total, be included in the Bank's credit submissions.

It is clear, however, that information regarding an exposure of Beneficial Finance Corporation to a client - and, indeed, of the exposures of the Bank's divisions other than Corporate Banking - was usually not included in the Bank's credit submissions. My Investigation has identified a number of credit proposals, which were recommended by the Lending Credit Committee, and approved by the Board which did not include information regarding an existing exposure of Beneficial Finance Corporation to the client. In response to a question from me, the Bank stated that:

"The Bank acknowledges that a past weakness in credit papers was that exposure information was frequently too narrowly based i.e. the information frequently related only to the Bank's (mostly Corporate Banking) exposure to a particular customer or industry and tended to overlook other group exposure e.g. those of Beneficial." ()

On 21 October 1988, a Global Risk Working Group provided to the Bank's Executive Committee "a first attempt" at identifying common clients of the Bank and Beneficial Finance Corporation.() The report identified fourteen common clients, but stated that there were problems in obtaining information from Beneficial Finance Corporation because "Beneficial Finance figures are available only twice a year as these figures are compiled manually by all the Beneficial branches". The report concluded by saying that "work is continuing in this area".

5.2.2.3 The Bank's Management of its Large Exposures

I have examined, in considerable detail, the Bank's management of its large exposures within the framework of its prudential policies. My examination has shown that the policies were generally observed and followed in the management of the Bank's credit exposures, if the ability of the Board to approve exposures of up to 30 per cent of the Bank's capital base for clients judged to be "blue chip", and more than 30 per cent where the exposure would be sold down within six months, is taken into account.

I have identified three groups of borrowers in respect of which the Board approved exposures which, at the time they were approved, exceeded the prudential limit of the amount equal to 30 per cent of the Bank's capital base. (The particular case of the Bank's exposure to the REMM Group is described in Chapter 14 - "Case Study in Credit Management: The REMM Group".) The three groups were:

(a) The Bank's total exposure to companies in the Adsteam Group amounted to more than 30 per cent of the capital base in 1989 and 1990. A number of companies in the Adsteam Group were regarded by the Bank as falling within the "stand alone" exception, and so were not included as part of the group exposure. The Bank's exposures to the Adsteam Group are examined in detail in Chapter 9 - "Case Study in Credit Management: The Adsteam Group".

(b) At various times the Bank's exposure to Industrial Equity and associated companies exceeded the prudential limit. These exposures are also examined in Chapter 9 - "Case Study in Credit Management: The Adsteam Group".

(c) A further exposure of more than 30 per cent of the capital base involved a number of transactions with Equiticorp between June 1987 and January 1988. These large exposures were approved on the basis that they would subsequently be sold down to within prudential limits. These dealings between the bank and Equiticorp are examined in Chapters 15 - "The Relationship with the Reserve Bank of Australia", and in Chapter 26 - "Dealings between State Bank and Equiticorp".

I have identified, too, a number of occasions on which the Board approved credit facilities on the basis that the total exposure would be subsequently sold down to a smaller level, where the Bank failed to sell-down an exposure as required by the terms of the approval of the loan. For example, on 26 May 1988, a report to the Board stated that four out of five loans approved subject to a sell- down of the exposure had not been sold down to the required level within the six month limit specified by internal guidelines.() A loan initiated by the London office for GBP 46.8M ($106.3M) was to be sold down to GBP 10.0M, but the sell-down was not achieved.() In such cases, the Bank was left with exposures in excess of those which were preferred. In none of these cases did the failure to achieve a sell-down result in the Bank being left with an exposure which exceeded its prudential limits.

The most significant factor in the management of the Bank's large exposures was unquestionably the very significant increase in the Bank's capital base. The Bank's ability to provide increasingly larger loans, and to do so within prudential limits, was directly related to the substantial increase in the Bank's capital base as used in determining the maximum exposures. Between July 1984 and October 1989, the Bank's capital excluding subordinated debt increased four-fold. The change to Prudential Statement E1, in August 1989, however, included subordinated debt in capital for large exposure reporting purposes (as tier 2 capital). Including such debt in capital, the increase in capital over the period was about 770 per cent. Over the same period, the monetary prudential limit of the Bank's large exposures increased 793 per cent, from $28.0M to $250.0M.

The Bank's large exposures (of greater than 10 per cent of shareholders' funds) were reviewed on a quarterly basis by the Reserve Bank, and I have reviewed its internal file notes regarding those exposures. A file note dated, 16 December 1986, indicates that, at the end of September 1986, the Bank had the highest ratio of large exposures to shareholders' funds (10.1 times) of its "peer group" of major trading banks and other state banks. The Bank had two exposures to non-bank, non-government clients that were in excess of 30 per cent of shareholders' funds, and twenty one such clients where there was an exposure in excess of 10 per cent of its shareholders' funds. The file note stated that the Bank had "reported increases in all areas of exposure over the quarter".

By the end of June 1987, however, the Bank's prudential position had improved significantly - total large exposures had fallen to only 1.8 times shareholders' funds. Reserve Bank file notes, dated 3 March 1987 and 7 August 1987, attributed the decrease in reported large exposures principally to the Bank's increasing capital, the August file note stating that shareholders' funds increased by $169.4M (40.3 per cent) during 1987. A Reserve Bank file note, dated 25 January 1988, stated that the size of the Bank's exposures were "within the averages of other State Banks". A file note, dated 28 August 1989, stated that the Bank's large exposures, as at June 1989, raised "no prudential concerns", and that the exposures were "generally below the peer group's average."

5.2.3 BENEFICIAL FINANCE CORPORATION'S CLIENT EXPOSURES

5.2.3.1 Beneficial Finance Corporation's Prudential Policies

As described earlier, Beneficial Finance Corporation operated semi-autonomously from the Bank, including the establishment of its own prudential policies regarding credit risk. Beneficial Finance Corporation's Board of Directors approved prudential limits for the company's maximum credit exposures which, like the Bank's, were based upon a proportion of its capital base.

Before January 1988, the general prudential limit was 10 per cent of Beneficial Finance Corporation's shareholders' funds, subject to approval of a higher exposure by the Board of Directors. At its meeting on 27 November 1987, the Board:

"... noted that a number of transactions recently considered by the Board were well in excess of the 10% of shareholders' funds limit previously established by the Board. Management was requested to submit a policy paper to the January meeting setting out the basis for establishing a higher maximum limit. Deals above that limit to only be considered if the excess has been set with other lending institutions." ()

At its meeting on 29 January 1988, the Board approved a new large exposure policy which was related both to the nature of the loan, and to the system of delegated loan approval authorities. The new policy provided for a quorum of four directors, including one State Bank representative, to approve loans of up to 25 per cent of the company's capital base. No express limit on the size of the credit exposure was set where the loan was approved by all available directors. The policy adopted was summarised in the minutes as follows():

Per Cent Share- Holders’ Funds		Based on Real Estate First Mortgage $M	Other Secured $M
>25	All available directors
15-25	Quorum of four directors including on State Bank Representative	27.0	20.0
10-15	Two directors, including on State Bank Representative	16.0	12.0
5-10	Credit Committee	10.5	7.5
5	Credit Sub-Committee	5.0	3.5
2.5	Regional Sub-Committee	2.5	1.5

Subsequently, an absolute exposure limit of 30 per cent of shareholders' funds was imposed, although the minutes of the Board of Directors' meetings do not record the limit being considered or approved. The minutes of the meeting held on 24 February 1989, at which a report on Beneficial Finance Corporation's exposures in excess of $5.0M was considered, record that:

"There are a number of clients where the total exposure is close to or greater than the prudential limit of 30 per cent of shareholders' funds. Management was asked to ensure that the limit was not exceeded." ()

The Board directed management, in one case where the "total exposure of $45.5M exceeds 30% of shareholders' funds ... to take immediate action to sell down the exposure." ()

At its meeting on 25 May 1990, the Beneficial Finance Corporation Board discussed the prudential exposure limits, the minutes noting that:

"The prudential exposure limit to any one client or group is to be reconsidered and recommendations put to the June Board meeting. The Board believed a limit of $20.0-$25.0M should apply, with larger deals or exposures co-ordinated with State Bank." ()

At the June 1990 meeting, the Board accepted management's recommendation that the prudential maximum exposure limit be reduced from 30 per cent to 20 per cent of shareholders' funds(), representing a maximum exposure limit of $38.0M.

5.2.3.2 Monitoring of Beneficial Finance Corporation's Large Exposures

The Beneficial Finance Corporation Board of Directors received half-yearly reports of the large exposures of Beneficial Finance Corporation. Although infrequent, these reports were, so far as my Investigation has determined, accurate and complete. The reports were compiled manually from information regarding client exposures provided by all Beneficial Finance Corporation branches.

The scope of these half-yearly exposure reports to the Board changed, over the period 1984 to 1990, as the size of Beneficial Finance Corporation's exposures increased. The reports presented from 1984 to September 1986 included all exposures of more than $2.0M in real estate, and $1.5M for other loans. In March and November 1987 only exposures of $3.0M or more were reported, and in June 1988 the lower limit for reporting was increased to $5.0M.

The Board also received, in later years, quarterly exposure reports which summarised the proportion of the loan portfolio represented by different exposure levels, providing a concise profile of the exposure levels in the portfolio.

5.2.3.3 Beneficial Finance Corporation's Management of its Large Exposures

As with the Bank, the increase in Beneficial Finance Corporation's capital after 1984 allowed it to increase significantly the size of its large exposures. Between 1 July 1984 and 30 June 1990, Beneficial Finance Corporation's capital increased by 226 per cent, from $58.1M to $189.5M.

The change to Beneficial Finance Corporation's prudential policy meant that the increase in the size of Beneficial Finance Corporation's exposures was even greater. The half-yearly exposure review presented to the Board of Directors on 5 September 1984 showed that, as at 26 July 1984, Beneficial Finance Corporation had only five exposures to clients or groups of clients of $5.0M or more, the largest being $5.9M, or about 10 per cent of the company's capital. Exposures of more than $2.0M for real estate, and other exposures of more than $1.5M, totalled only $87.0M out of total net receivables of $469.2M.

By 30 September 1990, however, the credit risks by exposure to client groups as shown in the Quarterly Report on Risk Exposure() were:

	Amount of Risk
Range	$M		%Total
Less than $20.0M	2,387.0		71.8
$20.0M to $24.9M	67.6		2.0
$25.0M $39.9M	548.0		16.5
Greater than $40.0M	322.9		9.7
	3,325.5		100.0

The September 1990 Quarterly Report showed that, as at September 1990, Beneficial Finance Corporation had 24 client exposures in excess of $25.0M. Of the total exposure of $870.9M to those clients, $428.9M, or 49.2 per cent, was non-performing. The three largest non-performing loans were $60.4M, $50.3M and $46.2M.

The changing nature of the risk profile of Beneficial Finance Corporation's loan portfolio was commented on by the Board. It has been noted above that, on 27 November 1987, the Board observed a number of transactions being submitted for approval that were "well in excess" of 10 per cent of shareholders' funds, and accordingly increased the prudential exposure limit in January 1988. At its meeting on 31 August 1989, the Board considered that:

"The high emphasis on transactions $25.0M to $39.9M seems too high compared to historical exposure levels. Mr Baker agreed to develop policy guidelines having a more satisfactory spread." ()

As shown by the figures cited above, and the minutes of the Board of Directors meeting on 24 February 1989 (quoted in Section 5.2.3.1), Beneficial Finance Corporation did, on occasion, undertake credit exposures which exceeded the 30 per cent of capital limit, although, the large exposures of Beneficial Finance Corporation were generally within the 30 per cent prudential limit. This was, assisted by Beneficial Finance Corporation's increasing capital - the exposure of $45.5M noted earlier as being in excess of the 30 per cent limit in February 1989, which the Board directed was to be sold-down was, in fact, not sold-down, as shown by its listing among large exposures in the June 1990 report to the Board. Normally, the increase in capital brought that exposure under the 30 per cent limit.

5.2.4 THE IMPACT OF BENEFICIAL FINANCE CORPORATION'S LARGE EXPOSURES ON THE BANK

As described above, the Bank's prudential large exposure policy did not extend to include the exposures of Beneficial Finance Corporation until October 1990, when a system of Group risk exposure management (the Prudential Customer Exposure Ceilings system) was approved by the Bank Board. The first report of the Bank Group's consolidated exposures presented to the Bank's Board was in April 1989, and, in August 1989, a detailed report of all exposures of the Group of $20.0M and more separately identified the exposures of Bank divisions other than Corporate Banking, and of Beneficial Finance Corporation.()

My review of the August 1989 and other schedules has shown that, in only one case, did the credit exposure of Beneficial Finance Corporation result in the Bank's prudential large exposure limit being breached. Mr Matthews' paper to the Executive Committee in October 1988(), which provided "a first attempt" at identifying common clients of the Bank and Beneficial Finance Corporation, showed that the Bank had an exposure of $91.3M to Equiticorp, and Beneficial Finance Corporation had exposures to Equiticorp of $77.3M, giving a combined exposure of $168.6M. This exceeded the Bank's maximum allowable exposure to a group of companies, which had been set at $150.0M in July 1987. The Group's total exposure was, however, later reduced to within prudential limits.

Apart from this exposure, in no case did an exposure of Beneficial Finance Corporation result in the Bank's large exposure limit being breached on a Group basis. Reserve Bank internal memoranda regarding the Bank Group's large exposures after the revision of Prudential Statement E1 in August 1989 all state that the Group's large exposures raised "no prudential concerns".

Of course, lending by the Bank and Beneficial Finance Corporation to a single client or client group can have implications for the Group other than the possibility of a Group exposure in excess of prudential limits. Most particularly, an exposure by both the Bank and Beneficial Finance Corporation to a single client can result in the Group having an exposure to the client which exceeds that which either the Bank or Beneficial Finance Corporation would individually assume.

To a large extent, such cases are a reflection of the different nature of the Bank's and Beneficial Finance Corporation's leading business. As expressed in his evidence to me by Mr J B Macky, who was a member of the Bank's Lending Committee:

"Tim [Clark] always insisted that a bank exposure and a Beneficial exposure were treated separately ... the Beneficial board worried about that and we worried about the bank's exposure." ()

An example of the Bank and Beneficial Finance Corporation having a common exposure to a particular project is the exposure to Somerley Pty Limited, which is described in detail in Chapter 13 - "Case Study in Credit Management: Somerley Pty Ltd".

The issue of the Bank and Beneficial Finance Corporation lending to the same client does not raise a question of the diversifiable credit risk in the Group loan portfolio. Rather, it is a reflection of the different nature of the lending business which each corporation carried on - in some circumstances, lending arrangements which were not part of the Bank's lending business were acceptable to Beneficial Finance Corporation.

Beneficial Finance Corporation's lending practices are to be examined in detail in a later Report.

5.2.5 SUMMARY

The important features of the management of the Bank Group's large client exposures are:

(a) During the period under review The large exposures of the Bank and of Beneficial Finance Corporation were managed separately by the Board of Directors and Management of the respective corporations. Each set its own prudential policies, and monitored only its own large exposures.

(b) Both the Bank and Beneficial Finance Corporation set maximum client exposure levels by reference to their own respective capital bases. The large increase in the capital base of each, and more particularly of the Bank, enabled them to very significantly increase the size of their own exposures. Over the period between July 1984 and July 1990, the size of both companies' largest exposures increased by approximately ten times.

(c) The Bank's prudential policies were broadly within Reserve Bank guidelines, although aggressively so. Its general limit of 20 per cent of capital was double the level preferred by the Reserve Bank, and the Board was prepared to approve exceptions which could, and did, result in larger exposures from time to time.

(d) The most significant increase in the dollar limit of the Bank's exposures, from $60.0M to $250.0M in October 1989, was neither considered nor approved by the Board. Indeed, the Bank's Board did not consider the issue of client exposure limits between July 1987 and October 1990.

(e) The Bank's monitoring and management of its large exposures was limited to the exposures of the Corporate Banking division, and did not include the exposures of other divisions, or of Beneficial Finance Corporation, on a regular basis until 1990.

(f) The Bank's management of its large exposures was, at times, aggressive. In 1986, it had a level of exposures in excess of the 10 per cent limit recommended by the Reserve Bank which in turn exceeded (as a multiple of shareholders' funds) those of other banks. Significant increases in the Bank's capital restored these exposures to more prudent levels. By 1990, the Bank's level of large exposures was, according to the Reserve Bank, below that of its peers.

(g) Beneficial Finance Corporation's prudential policy limits were significantly increased in 1988, to allow for maximum client exposures of up to 30 per cent of its capital base. This limit was, occasionally exceeded, upon approval by the Board of Directors. Beneficial Finance Corporation's compliance with it's own policies was also assisted by significant increases in it's capital base.

(h) Although Beneficial Finance Corporation's large exposures were not included with the Bank's to determine whether the Bank Group complied with prudent large exposure limits before 1989, none of Beneficial Finance Corporation's exposures to borrowers who were also clients of the bank had the result that the Group exposure materially exceeded the prudential limit established by the Bank in respect of its own exposures.

 

5.3 THE BANK GROUP'S INDUSTRY EXPOSURES

 

The most frequently cited aspect of the Bank Group's business which may have involved a concentration of credit risk is its exposure to the property and construction industries.

In its 1991 Annual Report, the State Bank provided the following summary of the Bank Group's loan portfolio exposures by industry as at 30 June 1991:

Industry	Total Exposures Per Cent	Non-Accrual Exposures Per Cent
Finance	25.8	12.8
Property	22.4	51.9
Personal	14.3	1.7
Manufacturing	8.9	2.0
Construction	7.7	12.5
Recreation	4.7	6.3
Agriculture	4.2	3.6
Retail	2.5	2.0
Public Administration	1.9	0.2
Wholesale	1.8	1.2
Community	1.4	0.8
Transport	1.3	0.4
Mining	1.2	1.0
Electricity	1.1	1.5
Communications	0.7	1.9
Other	0.1	0.2
	100.0	100.0

As can be seen, more than one-half of the non-accrual exposures of the Group at 30 June 1991 (which totalled $4,199.6M before provisions) were related to property. Property and construction together accounted for 30.1 per cent of total exposures, and 64.4 per cent of non-accrual exposures. A media release issued by the Bank in respect of the 1991 financial statements noted that "the finance sector, as defined by the ASIC codes used by the Australian Bureau of Statistics, also includes some property exposures".

The Bank's 1992 Annual Report grouped the exposures to the property and construction industries together, and cited the reduction of that exposure as a significant achievement during 1992:

"Exposure to the property and construction industries dropped markedly from 30.1 per cent to 20.6 per cent as a result of work-out of problem commercial property sales, write offs and a change in lending policy. With the separation of GAMD from 1 July 1992, the core bank's exposure to this segment has declined further to 11.7 per cent from the beginning of 1992-93, which represents a major improvement in the balance of the overall portfolio."

5.3.1 THE BANK'S INDUSTRY EXPOSURES

5.3.1.1 The Bank's Prudential Policies

The Bank's prudential policy regarding its exposure to particular industries was approved by the Board on 26 July 1984, and remained unchanged as at March 1991 (having been reconfirmed by the Board on 27 September 1990). The policy was a simple one:

"Exposure to any industry, other than the public sector, housing and broadacre farming, not to exceed 20% of "risk assets"." ()

Risk assets were defined in the supporting Board Paper as "all loans and investments, excluding liquids and shareholdings". "Risk assets", therefore, essentially meant the Bank's total loans, advances and receivables, including:

(a) deposits with and investments in AIDC Limited, Australian Reconstruction and Development Bank Limited and Primary and Industries Bank of Australia Limited;

(b) mortgages;

(c) instalment loans;

(d) overdrafts and fully drawn advances;

(e) Bankcard and Visa assets; and

(f) syndicated and placement loans.

It was not considered necessary to apply this limit either to the public sector (because this lending was said to be fully guaranteed by the government) or to housing or broadacre farming (as these were considered to be fully secure).

The policy approved by the Board of Directors did not address the matter of how an "industry" was to be defined, how many classifications would be used, nor how a credit exposure would be classified as relating to one industry or another. These matters of detail in implementing the broadly-stated policy were left to Management to address and implement.

As with the Bank's policy regarding large credit exposures, the industry exposure policy was limited to the Bank. It did not extend to impose any limits upon Group-wide industry exposures - the Boards of Directors of the various subsidiaries, including Beneficial Finance Corporation, were to implement their own prudential policies to apply to those subsidiary companies.

5.3.1.2 Monitoring the Bank's Industry Exposures

The limitation of the Bank's industry exposure policy to the Bank's own exposures was reflected in the monitoring of industry exposures and their reporting to the Bank's Board; the monitoring and reporting was, until the end of 1989, limited to the Bank's exposures.

Further, just as the monitoring and reporting of the Bank's large client exposures was limited to those of the Corporate Banking division, so, too, was that of the Bank's industry exposures; the industry exposure reported to the Board of Directors in the Monthly Operating Reviews did not include the exposures of divisions of the Bank other than Corporate Banking. This limitation was obvious from the Monthly Operating Reviews themselves, as the exposure report was clearly stated to be that of the Corporate Banking division.

While the limiting of the Bank's reporting in respect of large client exposures to those of the Corporate Banking division might not have been expected to result in material misstatements of large client exposures, the same cannot be said for industry exposures. The various divisions of the Bank may not have established significant loans to clients of the Corporate Banking division, but they may well have large exposures to particular industries, particularly commercial property. The Commercial Lending department, in particular, may have had very significant property exposures.

It was noted earlier, in the context of the Bank's large client exposure monitoring,() that Mr Matthews advised the Executive Committee in October 1988 that the Bank did not have "any mechanisms to accurately assess our total exposure as a Bank or a Group to any one individual, business entity, industry, region or country." According to a Reserve Bank Diary Note dated 30 January 1990, Mr Matthews advised the Reserve Bank that even then "SBSA's system for measuring exposures by industry group, including property, was not yet completed but could be ready by mid-year".

The Corporate Banking industry exposure report was based on information contained in the Commitment Register. The industry classification system used in reporting industry exposures was the Stock Exchange Statex codes, which classified credit exposures upon the basis of the main activity of the borrower. The Monthly Operating Reviews divided the industry exposures of Corporate Banking into 28 different classifications, and noted against each the industry exposure as a percentage of the total Corporate Banking portfolio, and as a percentage of the Bank's risk assets. This classification system, at least as used by the Bank, did not include a separate category "property". The property exposures were included in two categories, "Developers & Contractors", and "Property Trusts".() The reports show that, over the period June 1985 to June 1989, the exposure of the Corporate Banking division to developers and contractors increased from just $74.1M, or 7.94 per cent of the Corporate Banking portfolio, to $1,557.5M, representing 27.39 per cent of the portfolio, as follows:

Exposure to Developers and Contractors
As At June	Exposure $M	Proportion of Corporate Loans Per Cent	Proportion of Total Risk Assets Per Cent
1985	74.1	7.94	4.48
1986	190.6	6.57	4.33
1987	346.5	12.24	7.30
1988	611.2	14.25	8.56
1989	1,557.5	27.39	13.01

When the credit exposure to property trusts is added, the exposure of Corporate Banking to the commercial property sector at June 1985 was $101.9M, representing 10.92 per cent of Corporate risk assets and 6.16 per cent of Bank risk assets. By June 1989, the exposure totalled $1,809.7M, which was 31.82 per cent of Corporate risk assets, and 15.12 per cent of Bank risk assets.

The classification system was changed after July 1988 to utilise Australian Standard Industry Classifications, which reduced the number of industry classifications reported to the Bank's Board of Directors to ten, including "Construction", "Property and Business Services" and "Finance, Investment and Insurance". The Bank has informed me that the Property and Business Services classification predominantly included most exposures to property developers, although, as noted by the Bank in its Media Release regarding the 1991 accounts, the Finance, Investment and Business Services classification also included some industry exposures.

An industry exposure summary for the Bank Group as at 30 September 1990 and presented to the Board of Directors in October 1990, provided the following analysis of the principal industry classifications:

Industry	Corporate Exposure Per Cent	Total Banks Exposure Per Cent	Bank Group Exposure Per Cent
Property and Business Services	16.2	15.4	23.6
Construction	17.4	7.1	7.5
Finance, etc.	21.8	44.5	38.6

As can be seen, Property and Construction together - these classifications were combined in the Bank's 1992 Annual Report - represented 33.6 per cent of the Corporate Banking portfolio, 22.5 per cent of the Bank's exposure, and 31.1 per cent of the Group exposure. It should be noted that these figures do not include exposures in the form of personal housing loans.

5.3.1.3 Management of the Bank's Industry Exposures

The figures cited above for the Corporate Banking division's exposure to commercial property (Developers & Contractors, and Property Trusts) highlights one of the principal difficulties for managing the Bank's industry exposures presented by the lack of Bank-wide information - it was simply not possible to determine whether the exposure of the Bank was within the prudential limit. In particular, the figures show that the exposure of Corporate Banking to commercial property as at June 1989 represented 31.8 per cent of the Corporate portfolio. Although that was 15.1 per cent of total risk assets, the exposures of other divisions were, simply, unknown, and may have meant that the Bank's prudential limit was breached.

The first industry exposure report (which included all divisions of the Bank), presented to the Board of Directors in January 1990, indeed showed that the Bank's exposure to commercial property, as at 31 December 1989, was 21.1 per cent of the Bank's risk assets.()

In his evidence to this Investigation, Mr Masters highlighted the problems of trying to monitor the exposures of the Corporate Banking division against a prudential policy that referred to the Bank's total industry exposure and total risk assets:

"There were certain prudential limits put in and approved by board which provided that ... (the) percentage of your assets to any particular industry should not exceed 20 per cent of the bank's risk assets. So that then set up the framework. How did we operate with the other divisions with regard to those prudential requirements? The simple answer is we couldn't because there were no measuring system what so ever to tell us what the other areas of the bank's group risk assets were to combine with ours, which we did have to find out whether the total percentage of the bank combined with ours was within the parameters of the board requirement. Now, we took arbitrary views and that. We did a bit of mental calculation from time to time and it generally came out that, yes, we might be 25 per cent to the property industry and the bank group were probably below." ()

The lack of information regarding the exposures of other parts of the Bank clearly created difficulties for managing the exposure to particular industries. In fact, according to the evidence of Mr Masters, this lack of information was apparently used to justify credit proposals for clients in industries where the existing Corporate Banking exposure to that industry exceeded 20 per cent of total Corporate Banking risk assets. Mr Masters said:

"The approval process allowed the bank to look at individual credits and despite the fact that in corporate banking we put up that we had an exposure of X number of millions for this particular category and then our percentage of our total risk assets in corporate banking, that category was 26 per cent or should only be 20 per cent of the total bank - when those proposals came out, there was always discussion about why we have a 26 per cent concentration of risk in property construction.

Then the argument came, oh, yes, that's only in corporate banking. If you take the whole bank and look, it was probably less than 20 per cent and it's going to add ($)500,000 per annum to our profit figure, this particular transaction. So things kept getting looked at on individualistic transactions and went right through to the board." ()

In March 1989, Mr Masters presented to the Board of Directors a review of Corporate Banking's property related exposures.() The paper reported total commitments to commercial property of $1,557.3M which, it was said, represented 28.16 per cent of total Corporate Banking commitments, and 15.81 per cent of the Bank's total risk assets. These commitments were analysed by state, region (ie suburban, country, central business district) and type (ie commercial, retail, industrial), and included a brief review of the property market in each state.

The Paper informed the Board that, although the Corporate Banking exposure did not exceed 20 per cent of the Bank's total risk assets:

"On a global basis, further analysis is required to identify property risk assets managed by Retail Banking Division and, if appropriate, Property Department. Property exposure to subsidiary companies should also be considered. This would confirm exactly what the Bank's total property risk assets are."

The minutes of the Board meeting record that Directors "noted" the Report.

The information contained in Mr Masters' Report of March 1989 highlighted significantly increased projected vacancy rates in Sydney and Melbourne, and a peak in oversupply in Adelaide in 1990. It also showed that 53.1 per cent of Corporate Banking's property-related commitments were in the central business districts of South Australia, Queensland, Victoria and New South Wales. No consideration was given, however, to how the projected deterioration in the property market would impact upon the Bank's commitments or the value of any security held. The paper simply commented that:

"Further analysis also needs to be undertaken of the loan maturity/drawdown pattern of the total property portfolio (indeed all risk assets) to allow determination of maximum exposures at future times. This will assist in managing our exposure with regard to predicted oversupply etc."

The Investigation has seen no evidence that this analysis was performed.

The Reserve Bank raised its concerns regarding the Bank's exposure to commercial property with the Bank's management, particularly with Mr Matthews, on a number of occasions. At a prudential consultation meeting, on 15 November 1988, the Reserve Bank expressed "some concern" at the Bank's "increased involvement in property development financing". A Reserve Bank Diary Note, dated 2 March 1989, of a meeting with Mr Matthews and Mr K L Copley, of the State Bank, records that the Reserve Bank counselled that the Bank needed "to watch the commercial property exposures very carefully. Mr Matthews acknowledged the bank was carefully monitoring the group's exposures (including Beneficial Finance Corporation) in this regard."

A Reserve Bank Diary Note, dated 29 June 1989, records that the matter of the Bank's "high level of lending in construction reported in the Commercial Finance return" was raised with Mr Matthews, who replied that he was "not aware of the data shown on the return but indicated that SBSA had been looking to boost commercial business".

A further Diary Note, dated 17 October 1989, records Mr Matthews as informing the Reserve Bank, in respect of the Bank's property and construction exposures, that the Bank was "comfortable with current exposures but if a crash did occur, group would put underlying property currently held as security into a trust and see each of the construction/development projects through".

Again, in January 1990, a Reserve Bank officer contacted Mr Matthews expressly to discuss the Bank's property exposures, drawing Mr Matthews' attention to the fact that the Bank's ABS Commercial Finance Return showed that the Bank's loans for construction and property and business services represented 72 per cent of the total commercial approvals by the Bank during 1989.

Despite the repeated raising of the issue by the Reserve Bank, I have found no evidence of any effective steps taken by the Bank to address the large property exposure in its loan portfolio. Indeed, between June 1988 and June 1989, the Corporate Banking exposure to commercial property increased by $1,008.6M, from $801.1M to $1,809.7M, an increase of 125.9 per cent. The increase in the exposure to Developers and Contractors was 154.8 per cent.

Moreover, no effective action was taken to identify exactly what the Group exposure to commercial property was. As was noted earlier, Mr Matthews is recorded as advising the Reserve Bank, on 30 January 1990, that the Bank's "System for measuring exposures by industry group, including property, was not yet completed but could be ready by mid-year."()

5.3.2 BENEFICIAL FINANCE CORPORATION'S INDUSTRY EXPOSURES

5.3.2.1 Beneficial Finance Corporation's Prudential Policies

At the time of its acquisition by the Savings Bank of South Australia in April 1984, Beneficial Finance Corporation was already well established in property financing. The company's 1984 Annual Report indicated that lending for short-term construction and bridging finance represented 32.2 per cent of gross receivables, and longer term advances on established properties represented a further 35.8 per cent. The average loan size was, however, small - $0.137M for construction and bridging finance, and only $27,000 for longer term advances.

Over the years after 1984, the Board of Directors approved a variety of prudential policies related to Beneficial Finance Corporation's traditional lending markets. For example, policies were approved limiting the exposure to funding for sub-divisions and caravan parks, and limiting the exposure to real estate away from major population centres.

No prudential policies were, however, considered or adopted to limit Beneficial Finance Corporation's exposure to the commercial property sector, generally, or to construction and development, in particular. There were, based on the evidence before me, simply no applicable prudential policies in that regard, although Mr J A Baker, the Managing Director of Beneficial Finance Corporation, informed me that there was a "general understanding" with the Board that "real estate receivables should be about 50 per cent of the total portfolio." ()

The Board did, on several occasions, advert to the need for a general limit of the company's overall exposure to commercial property, or to particular segments of the market.

At its meeting on 24 April 1987, the Board of Directors, in reviewing the monthly operating review for March 1987, addressed the issue of Beneficial Finance Corporation's exposure to real estate. The minutes record:

"Sales Mix: The Company's Risk Exposure in the real estate area was highlighted with over 40% of sales in this area. The 1987/1988 budget is to consider the mix in sales with a view to reducing exposure in the real estate portfolio." ()

My review of the 1987 strategic plan, subsequently presented to the Board, disclosed that the plan did not examine the matter of Beneficial Finance Corporation's exposure to real estate, and no policy or practice limiting that exposure was implemented.

At its meeting on 26 August 1988, the Board did question whether such a prudential policy might be necessary:

"The Board queried whether there should be a cap placed on the extent of C & D business written by the company, particularly in view of the high levels of arrears and problem loans. A report will be prepared for the Board for the October meeting in which consideration will be given to setting limits by State or other geographical divisions and by type of project." ()

At the Board meeting on 28 October 1988, a report on major problem construction and development loans was reviewed by the Board, but no prudential policy was considered.

The minutes of the Board meeting, held on 29 September 1988, record that a discussion of the company's Queensland operations "led to discussions on wider company matters", which included:

"There could be a need for increased conservatism in the Company's lending in view of possible future economic uncertainties producing greater downside risks. Care needs to be taken to ensure that we are not too heavily involved in specific areas of the market." ()

There is no evidence of any action being taken in response to this concern.

A business plan for the 18 months ended 30 June 1992, prepared in 1990, listed as an element of the Australian Business Division's "action plan", the maintenance of a "prudent portfolio mix". Its "target" was to ensure that, during the plan period, real estate products did not exceed 50 per cent of the portfolio.()

5.3.2.2 Beneficial Finance Corporation's Monitoring of Industry Exposures

Each month, the Board of Directors of Beneficial Finance Corporation received, as part of the monthly operating review, a summary, by division, of the company's receivables and risk assets. That summary identified the total receivables classified as Real Estate, Construction and Development, Structured Finance, Projects and Commercial"products".

The report did not, however, provide any classification of credit exposures according to the associated industry exposure. It was not possible to identify, from the monthly reports, the company's total exposure to commercial property, nor to particular sectors of the commercial property market.

Such a report was requested by the Board, at its meeting on 24 February 1989; the minutes of the meeting record that:

"The Board requested a report at the March Board Meeting on Beneficial's exposure to two areas-

(a) CBD throughout Australia

(b) Resort area investments" ()

A list of client exposures in both areas was presented to the Board on 31 March 1989.

The Board did receive, however, quarterly reports regarding Beneficial Finance Corporation's risk exposures, which identified the company's total exposures (including equity exposures) to "real estate". These reports clearly showed the extent of the total property exposure, although not its detail. The exposure report for the December 1989 quarter showed that Beneficial Finance Corporation's exposure to real estate was 56.4 per cent of the company's risk assets.

5.3.2.3 Management of Beneficial Finance Corporation's Industry Exposures

As noted above, concerns were expressed, from time to time, regarding aspects of Beneficial Finance Corporation's property exposures. For example, the minutes of the Board meeting on 31 August 1989 record that, in the course of a discussion regarding the East End Market, "concern was expressed about the exposure of the State Bank Group to other Adelaide CBD buildings". There is no indication, however, that this expression of concern was translated into effective action to rectify the exposure. Attempts were made to sell-down the exposure to the East End Market. Mr Baker informed me that efforts were made to increase Beneficial Finance Corporation's non-real estate business, particularly motor vehicle leasing.()

As noted above, Beneficial Finance Corporation's risk exposure report as at 31 December 1989 showed an exposure to real estate of 56.4 per cent of the portfolio.

The Bank's industry exposure report, as at 30 September 1990, showed Beneficial Finance Corporation's exposure to property and construction as 60.1 per cent of the portfolio.

In his submissions to me in respect of this Chapter of my Report,() the former Managing Director of Beneficial Finance Corporation, Mr Baker, expressed doubt that the figure of 60.1 per cent was correct. In particular, Mr Baker noted that Beneficial Finance Corporation's June 1990 Quarterly Report on Risk Exposure showed its exposure to "Real Estate Products" as being 51 per cent of total assets.

The difficulty is that the exposure to real estate can be calculated in a number of ways: as a proportion of "products"; as a proportion of receivables; or according to the nature of the security taken. The most appropriate method will depend upon the structure of the credit facility, and particularly the nature of the risk faced by the lender.

Although the basis of the Bank's calculation of Beneficial Finance Corporation's property exposure in September 1990 is not described in the industry exposure report, I have satisfied myself that the figure of 60.1 per cent is a materially accurate statement of Beneficial Finance Corporation's risk exposure to the commercial property market. In particular, the total group exposure shown in the Bank's industry exposure report, as at September 1990, is consistent with other calculations by the Bank of that exposure, including that stated in its 1991 annual report. Further, Beneficial Finance Corporation's own calculation of its "equities and real estate exposure" - as opposed to its "exposure by product" - produced similar figures. For example, as noted the report, as at December 1989, showed the exposure to real estate as 56.4 per cent of risk assets.

5.3.3 THE IMPACT OF BENEFICIAL FINANCE CORPORATION'S EXPOSURES UPON THE BANK

Beneficial Finance Corporation's large exposure to commercial property, which exceeded that of the Bank, had obvious implications for the Group's total property exposure. The Group exposure is shown by the following information contained in the report on the Bank Group's Industry Exposures as at 30 September 1990:

Exposure of the Risk Portfolio per Industry
Industry	Bank Per Cent	Beneficial Per Cent	Group Per Cent
Property and Business Services	15.38	47.03	23.58
Construction	7.07	13.06	7.51
Finance, Investment, etc	44.52	16.04	38.59

As can be seen, the inclusion of the property exposures of Beneficial Finance Corporation (and of other subsidiaries) increases the proportion of the risk portfolio related to property and construction from 22.45 per cent for the Bank alone, to 31.09 per cent for the Group. Beneficial Finance Corporation's exposure to property and construction as calculated by the Bank amounted to 60.09 per cent of its risk exposures.

5.3.4 SUMMARY

The principal aspects of the Bank's and Beneficial Finance Corporation's management of their credit exposures to particular industries are:

(a) The monitoring and management of industry exposures was undertaken separately by the Bank, and by Beneficial Finance Corporation (and by other subsidiaries). No group-wide prudential policy was established, at any time, to limit the Group's exposure to particular industries.

(b) The Bank's prudential policy, established in 1984 and unchanged thereafter, set a limit for industry exposures of 20 per cent of the Bank's total risk assets.

(c) The Bank's system for monitoring industry exposures was, until the end of 1989, limited to the Corporate Banking division's exposures as recorded on its Commitments Register. The industry exposures of other divisions of the Bank were not monitored and aggregated with those of Corporate Banking to enable the Bank's industry exposure to be determined. Accordingly, the Bank was unable to determine its total exposure to commercial property, and whether that exposure was within prudential limits.

(d) The exposure of Corporate Banking to commercial property increased by more than 1,675 per cent, between June 1985 and June 1989, from $101.9M to $1,809.7M. The increase was particularly rapid in 1988 and 1989. By June 1989, the exposure of Corporate Banking to commercial property represented 31.8 per cent of the Corporate loan portfolio. The exposure of the corporate portfolio, therefore, exceeded 20 per cent of that division's risk assets.

(e) The lack of any information system for monitoring and reporting of the property exposures of divisions of the Bank other than Corporate Banking had the effect that the management of the Corporate Banking division did not feel constrained to limit the division's exposure to commercial property development to 20 per cent of the division's risk assets. Instead, the division effectively operated on the assumption that other divisions had little or no exposure to commercial property.

(f) From 1988, the Reserve Bank repeatedly expressed its concern regarding the bank's exposure to commercial property.

(g) Notwithstanding the lack of a Bank-wide (and Group-wide) monitoring system, and the concerns raised by the Reserve Bank, there was an extraordinary increase in the Bank's lending for commercial property in 1989. During 1989, lending for commercial property comprised 72 per cent of total commercial approvals by the Bank. The exposure of Corporate Banking to commercial property increased by $1,008.6M over the year, more than doubling the exposure. The exposure of Corporate Banking to commercial property increased from 18.9 per cent of Corporate risk assets to 31.8 per cent, and the Corporate Banking exposure alone represented 15.1 per cent of the Bank's total risk assets by 30 June 1989. As shown by the report of industry exposures, as at 31 December 1989, the Bank's total exposure exceeded 20 per cent of risk assets.

(h) Beneficial Finance Corporation did not establish any formal prudential policies limiting its credit exposure to property, even though the Board did, on occasion, refer to the need to control that exposure, both generally, and with respect to particular market segments. By September 1990, lending for property and construction represented about 60 per cent of the risk portfolio.

(i) The quarterly risk exposure reports submitted to the Beneficial Finance Corporation Board provided details of the total property exposure, although not of the exposure to particular sectors, such as central business district and tourist resort developments. The report presented in January 1990, for the December 1989 quarter, showed that the exposure to real estate was 56.4 per cent of risk assets.

(j) The property exposures of Beneficial Finance Corporation, and of other subsidiaries, had a significant impact upon the Bank Group's total credit exposure to commercial property. The Group exposure - in excess of 30 per cent of the total portfolio - was higher than that of the Bank itself, and was, on a Group basis, well in excess of the prudential limit established by the Bank in respect of its own industry exposures.

 

5.4 THE BANK GROUP'S GEOGRAPHIC EXPOSURES

 

5.4.1 SIGNIFICANCE OF THE GROUP'S GEOGRAPHIC EXPOSURES

The third aspect of the prudent management of diversifiable credit risk is the geographic spread of the credit exposures in the loan portfolio. Shortly stated, a loan portfolio should not be overly concentrated upon particular geographic areas, because an economic downturn or recession affecting those areas could have serious implications of the viability of the portfolio.

There has, however, been no suggestion that the Bank Group's loan portfolio was overly concentrated upon any geographic area, other than JP Morgan's advice that the portfolio was overly concentrated upon exposures in South Australia. The Bank's 1991 Annual Report noted that the "Group exposures are distributed fairly evenly over the three geographic areas" - South Australia, interstate, and overseas - and provided a summary of the Bank Group's loan exposures by geographic area:

Geographic Area	Total Exposure Per Cent	Non-Accrual Exposures Per Cent
South Australia	34.8	38.2
Interstate	31.1	46.8
Overseas	34.1	15.0

The Bank's analysis indicates that the worst performed sector of the loan portfolio was the interstate exposures, while the overseas exposures had the lowest rate of non-accrual exposures. The Bank's Media Release regarding its 1991 financial results attributed the heavier weighting of non-accrual loans in Australia to "the problems in Australian commercial property markets and the national economic recession".

To this explanation could be added:

(a) The higher proportion of non-accrual exposures interstate than in South Australia is a reflection of the fact that the interstate exposures involved a much higher proportion of corporate loans, where the Bank's losses were highest. The Bank's housing lending was largely limited to South Australia.

(b) The overseas exposures included significant portfolios of low-risk exposures (money market deposits and treasury assets), and a portfolio of housing loans in New Zealand.

An analysis of the loan portfolio, as at 31 December 1990, by region and non-performing loans is provided at Section 4.1 of Chapter 4 - "Direction-Setting and Planning, which shows that there was a higher proportion of non-performing loans overseas (24.7 per cent), when calculated on the basis of assets with a risk weighting of more than 20 per cent.

The significance of the geographic spread of the Bank's credit exposures lies not in the issue of concentration of risk, but in the Bank's management of the rapid growth of exposures in lending markets where it had not operated to any significant degree in the past, and hence lacked sound knowledge and experience of local conditions. Reference should be made particularly to Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms"and Chapter 19 - "The Overseas Operations of the State Bank".

5.4.2 THE PRUDENTIAL POLICIES OF THE STATE BANK AND BANK GROUP

Although the geographic spread of the Group's credit exposures did not involve a concentration of credit risk - indeed, it can fairly be said that the Bank's acquisition of assets interstate and overseas significantly improved the diversifiable credit risk profile of the portfolio by lessening the Bank's exposure to South Australia (which JP Morgan suggested, in 1991, was still excessive) - there are two features of the Bank's prudential policies which require mention.

First, the Bank did set prudential exposure limits in respect of its overseas assets. An important feature of these limits, however, is that they were significantly increased as the Bank's overseas assets grew as a proportion of total assets.

Geographic limits in respect of overseas credit exposures of the Bank were first approved by the Board on 22 November 1984. The policy approved by the Board established a limit for total foreign credit exposures of $600.0M, with sub-limits of $300.0M for direct advance and contingent commitments.

On 25 July 1985, the Board was told that these limits had "proven restrictive" in some cases, and that overseas business opportunities were increasing. The Board consequently approved revised country limits, and the overall exposure limit was increased to $700.0M "in line with the guideline of containing off-shore commitments for the time being to about 20% of total assets presently standing at $3.4 billion." () The Board Paper informed the directors that these limits would "require reviewing again within the next 12 months in the light of development of London Branch, Corporate growth and general international expansion."

Only two months later, on 26 September 1985, the Board approved further increases to the overseas country limits, this time setting a total exposure limit of $1,100.0M, with sub-limits for direct and indirect commitments of $600.0M and $500.0M respectively. The Board Paper restated the Bank's "policy on restricting offshore assets to 20% of total assets." ()

In December 1985, the Board was again asked to amend the off-shore exposure limits because total off-shore direct assets stood at $560.0M, only $40.0M short of the maximum allowed. It was argued that exposure to New Zealand, which at that time stood at $172.0M, should be excluded from the calculations and given a stand-alone limit on the basis that:

"The similarities and close proximity of the two countries placed the Bank in a relatively better position to monitor risk in New Zealand compared to that in other countries." ()

The specific policy for New Zealand risk was approved as:

". New Zealand assets be limited to 5.0% of the Bank's total assets;

. New Zealand contingent exposure be limited to 5.0% of the Bank's risk assets;

. Board approval required for New Zealand assets to exceed $A200m and for contingent exposure to exceed $A100m." ()

On 24 July 1986, the Board removed all dollar restrictions on total off-shore and New Zealand exposures, leaving the limits expressed as a percentage of Bank total assets. Total direct and contingent off-shore assets, and off-shore swap exposures, excluding New Zealand, were each to be limited to 20 per cent of Bank total assets. New Zealand direct, contingent and swap exposures were each limited to 5 per cent of Bank total assets.() At 30 June 1986, the Bank's total assets stood at $5,470.7M.() This then gave a limit of $1,094.1M for each of the three types of off-shore exposure, excluding New Zealand, and $273.5M for each of the New Zealand limits.

In November 1988, the New Zealand country limit was increased to 15 per cent of the Bank's balance sheet, following the acquisition of Security Pacific Bank New Zealand Limited.()

The Credit Policy Manual, issued in September 1988, contained guidance as to how the country of risk was to be determined, stating that:

"As a general rule, the risk should belong to the country on which the principal protection as to the repayment of the loans depends. The risk of each loan can only be located after careful scrutiny of the overall situation, covering safeguards against loss and country jurisdiction." ()

No further changes were made (other than to approve from time to time revised individual country and bank limits within these guidelines) until 22 June 1989, when the Board confirmed that the off-shore exposure limits, excluding New Zealand, should be re-defined as 20 per cent of total Bank Group assets, rather than 20 per cent of total Bank assets, stating that:

"The original intention of this policy was that the total assets figures was to reflect total Group assets, although this was subsequently interpreted as being total Bank assets." ()

In line with Reserve Bank requirements, the Board also resolved that "offshore assets and total Group assets figures be calculated for this purpose on a risk weighted basis".

As suggested by the Minutes quoted above, the Bank's prudential policy regarding its overseas exposure was apparently intended to operate on a Group-wide basis. At its meeting on 25 March 1988, the Beneficial Finance Corporation Board considered the company's purchase of receivables in New Zealand, and noted that:

"A check is to be made with State Bank of South Australia in relation to their country exposure to New Zealand. It may be necessary for the Bank to consider an increase in its New Zealand limit." ()

Apart from its acquisition of assets in New Zealand, Beneficial Finance Corporation did not engage in lending activities overseas. At the Board of Directors' meeting on 26 May 1989, the Board resolved, in response to a proposed credit transaction in London, that:

"... as a matter of policy, that any transactions which are outside of Beneficial Finance's sphere of geographical operation, should be referred to the State Bank entity operating in that area." ()

The second important aspect of the Bank's prudential policy regarding geographic exposure levels is that no policies were set regarding exposure levels within Australia. The Bank's policies on geographic exposure were limited to the Bank's off-shore exposures. There is no evidence of any geographic exposure policies relevant to the Bank's exposures within Australia, and no regional limits were imposed.

5.4.3 REPORTING OF GEOGRAPHIC EXPOSURES

The Bank's procedures for reporting of its geographic exposure, like its policies on geographic risk, concentrated upon country risk. The level of the Bank's credit exposure in its interstate offices was not reported to the Board of Directors on a regular basis, although some information regarding the total asset level interstate was included in the Bank's Annual Reports in 1987 and 1988.

The Bank has informed me that monthly Geographic Location Summaries were produced from the Commitment Register, which was used by Corporate Banking Managers and Senior Managers for "verification" and "management information" purposes.() This regional information was not provided, formally at least, to either the Executive Committee or the Board.

When the first overseas exposure limits were set in November 1984, one of the conditions set was that:

"Activity reports against approved limits are to be presented ... quarterly to the Board and Executive Committee by inclusion in the Quarterly Operating Review." ()

From December 1985 to June 1989, the Group Operating Reviews contained a comparison of actual exposure to approved limits for each country with which the Bank had business, and a summary comparison of total off-shore exposure to approved limits. This analysis, however, did not break down the off-shore assets between treasury dealing assets, such as money market loans, and corporate banking type facilities granted by off-shore branches. Thus, it was not possible for the user of the report to identify the type of exposure to each country. Separating the assets of the Treasury division from those of the International Banking division would have provided much more meaningful management information on the Bank's geographic exposures.

In July 1989, the format of the Monthly and Quarterly Operating Reviews was changed. The new format included high level information only on the total level of off-shore and New Zealand assets as compared to total Bank Group assets. There was no longer any information on either the country of risk or the office which had originated the exposure. The Bank's response to questioning about the lack of off-shore exposure reporting in the revised Operating Reviews was simply that:

"The Board did not require any format changes during the trial period." ()

In their submission to me, certain past and present directors of the Bank and Beneficial Finance Corporation have asserted that there were weaknesses in the reporting of the Bank's off-shore exposures, particularly in the reporting of exposure to off-shore property markets:

"... the Board were never kept abreast of the extent to which the State Bank was committed to lending to the corporate sector in London and New York, a problem exacerbated by the amalgamation of the International and Treasury Divisions, such that separate figures for the Bank's exposure to the London/New York property markets were never produced to the Board." ()

Although this submission does point to deficiencies in the information that was supplied to the Board, a review of the Board Minutes discloses that the Board did not request any further information. If the Board was dissatisfied with the level of management information which it received regarding the assets administered by the Bank's off-shore offices, it should have requested more detailed analyses of those assets.

The reporting in respect of the Bank's foreign businesses is examined in detail in Chapter 19 - "The Overseas Operations of the State Bank".

5.4.4 SUMMARY

The important aspects of the Bank Group's geographic spread of credit exposures are:

(a) The Bank Group's credit exposures were, by 1990, broadly diversified both interstate and overseas. Far from involving any concentration of risk, the spread of the Bank's activities outside South Australia resulted in an improved diversifiable credit risk profile for the Bank's asset portfolio.

(b) The importance of the extension of the Bank's business interstate and overseas lies with the way in which that growth and diversification into new and unfamiliar markets was managed.

(c) In that respect, the Bank's prudential limits in respect of its overseas assets were rapidly expanded, as the need arose, to accommodate the off-shore business growth.

(d) The Bank did not establish any prudential limits or guidelines in respect of the geographic spread of its business activities within Australia.

(e) The Board of Directors did not receive reports regarding the level of the Bank's interstate loan exposures. Reports regarding foreign exposures were not sufficiently detailed to enable loan exposures, as opposed to Treasury assets, to be identified. Nor were foreign credit exposures reported by industry classification.

 

5.5 MONITORING GROUP-WIDE CREDIT RISK

 

As has been described above, the Bank and Beneficial Finance Corporation separately established and monitored their own credit exposures until 1989. Even within the Bank itself, the monitoring of the credit risk associated with the loan portfolio - particularly client and industry exposures - was limited to the Corporate Banking division. It was not until 1989 that any real steps were taken to implement an effective system of Group-wide credit risk management, with the establishment from 1 July 1989 of a specialist Group Risk Management division.

5.5.1 THE EVOLUTION OF GROUP RISK MANAGEMENT

The need to establish a system for managing credit risk on a Group-wide basis was expressed as early as 1985. The 1985 strategic plan, dated 25 March 1985, listed as one of the Bank's strategic five year objectives the enhancement of "management information to provide ... extended customer, currency, industry and interest rate exposure reporting," () and considered the need to ensure that "wherever possible compatibility in data processing facilities is maintained across the group." ()

The subsequent profit plan (for the 1986 financial year) repeated the need for additional management information, but gave no more specific direction for this task than to state that "more work may need to be done on industry and country risk." ()

In October 1985, Mr M L Brown, Manager, Operational Planning, and Mr C W Guille, Acting Chief Manager, Planning, prepared an information paper on the Bank's prudential arrangements. This was presented to the Executive Committee on 25 October 1985 with the comment that it had also served as a background paper for the prudential discussions which had been held with the Reserve Bank two days earlier. On the subject of the monitoring of risk concentration, the paper concluded:

"The main problem area is management information systems ... The Bank has excellent procedures for monitoring major corporate credit exposures against limits. In the near future, however, there may be a need to:

- establish credit limits for certain statutory authorities, the four major trading banks and the State & Regional banks;

- fully computerise and centralise limits and exposure monitoring for all customers, banks and country limits; and

- establish systems for Bankwide recording of exposures to industrial groupings (Corporate Division currently maintains such exposure statistics for corporate loans)." ()

The subject of management information systems was raised at a meeting with the Reserve Bank on 12 September 1986. This meeting was attended by Mr Clark, Mr Matthews, Mr Hazel, and Mr Masters. There is no record of this meeting in either the Board or Executive Committee minutes, but the Reserve Bank's Diary Note of that meeting states:

"Mr Marcus Clark observed that SBSA had "a lot of catching up" to do on its management information systems. He said that there had been a new system before the merger of the two banks and that there was to be further development of systems now. Mr Matthews stated that they hoped to have a good management information system by the end of 1986/87; in fact, their game plan for the year was to improve credit control and management information systems.

Mr Kelleher asked whether SBSA was confident that it had a handle on its risk exposure. Mr Masters indicated that their initial objective had been to get assets on their books, mainly by syndications for prime corporates (mostly for not longer than three years and at fairly fine margins). Their portfolio had grown quickly to $2 billion, but they did not see a lot of risk in it as they did their own credit assessment of all their customers (and did not rely on a syndicate leader's credit assessment) and they also found comfort in the fact that they were participating with large banks." ()[Emphasis added]

In October 1986, a Joint Board/Executive Conference was held at which Mr Matthews presented a paper on "Prudential Limits - Management and Control" which outlined the Reserve Bank's approach to supervision and its guidelines in a number of areas including the concentration of credit risk. The paper also listed the Bank's policies for limiting this risk, but did not explain how the Bank monitored compliance with those policies.

In September 1987, Mr Matthews expressed concern about the quality of the information on the Bank's large exposures which was being reported to the Reserve Bank. His main concern was uncertainty as to who was responsible for maintaining records of the Bank's commitment to various organisations. In a memorandum to Mr Masters, he requested that Corporate Banking undertake this responsibility and arrange for other divisions to report changes in commitments to Corporate Banking.() There is no evidence of any action being taken in response to Mr Matthews' instruction.

The 1988 strategic plan (for the 1989-1993 financial year) unequivocally referred to the need for better information of Group credit risk exposures:

"Seeking expansion through Retail and Corporate Banking, Finance Company, Merchant Banking, Executor and Trustee, Stockbroking and Real Estate Business Units will require management of the Group's aggregate exposure to individual retail customers, companies, industries and countries (Group Global Risk Management) to be in the forefront of Management concerns." ()

At the Executive Committee meeting of 15 July 1988, the General Manager, Treasury and International:

"... advised that a transaction recently presented to the Lending Credit Committee which involved both Beneficial Finance and State Bank providing funds, highlighted that there was a need for greater emphasis on Global Risk Management to ensure that the interests of the Group were protected where more than one member of the Group were involved with a particular transaction or company." ()

As a result of this advice, Mr Matthews, the Chief General Manager, presented a paper to the Executive Committee on 19 August 1988, which identified the main risks faced by the Bank as credit risk, interest rate risk, maturity/liquidity risk, insurance risk, technological risk, personnel risk, capital adequacy risk and other risks (which included settlement risk, foreign exchange risk and fraud). The Minutes of the Executive Committee meeting record that the Bank needed to:

". recognise all possible areas of risk;

. assess the impact on the business in the event of default of a counterparty;

. develop policies and procedures where necessary to mitigate loss;

. assign responsibility for administering and monitoring the area of risk." ()

The Minutes identified, as the first of the "main areas of risk":

"Credit risk ... and also an associated "market concentration" risk, where it was important that the Bank have an appropriate spread of risk to maintain a prudential balance and to cover movement in the world, country, regional, industrial and business unit economic environment."

The paper presented by Mr Matthews went on to say that:

"At this time we do not have any mechanisms to accurately assess our total exposure as a Bank or a Group to any one individual, business entity, industry, region or country." ()

This statement was not recorded in the Executive Committee minutes.

The Executive Committee agreed that:

"... the Chief General Manager would take responsibility for overall management of the Group Global Risk and that he would provide a report at least on a quarterly basis to Executive Committee and also report on any urgent matter which required attention." ()

In October 1988, Mr Matthews reported that a Global Risk Working Group had been formed to determine the best systems approach, and that user divisions were being assisted in writing specifications for their operational and information requirements. By February 1989, development had proceeded to the stage where the broad structure of the data collection and reporting system required had been identified, and the general specifications for input requirements had been completed. It was pointed out, however, in a paper from Mr Matthews to the Executive Committee in February 1989, that much of the information at that time available from divisions and subsidiaries was either not in sufficient detail, or was not in a form that was readily available by computer processing, or both. The paper also highlighted the need to implement common classification standards throughout the Group, particularly for industry exposures, in order to produce timely and accurate reporting.

The Board of Directors was aware of the need for adequate Group risk management systems. Apart from the references in the 1985 and 1988 strategic plans, a copy of the Minutes of the Executive Committee meetings of 15 July and 19 August 1988 had been provided to the Board and were "noted".() The minutes of the Board meeting held on 23 March 1989 record that:

"A Director expressed concern that with the growth of the Bank and Group it would be important to continue to ensure that information in relation to the Group exposure was available for management purposes.

Directors were advised that the Bank was giving a high priority in continuing to develop its Group Global Risk Management techniques in order that it could accurately assess its Group risk." ()

In April 1989, the first report of the Bank Group's exposures to clients or client groups was presented to the Board. This included the exposures of Beneficial Finance Corporation and various divisions of the Bank. The Board was told that, in future, this information would be available quarterly. Although this report to the Board made no mention of the problems encountered in its preparation, a progress report to the Executive Committee in May 1989 commented:

"This exercise highlighted the difficulties in obtaining accurate and timely information from current records and data bases. This exercise also emphasised the urgent need for common terminology and systems to permit electronic downloading of the required information." ()

The May 1989 progress report commented that a draft paper on common terminology, and a list of items for inclusion in an exposures database, had been circulated. The progress report also summarised the steps still to be taken:

"The task ahead is to standardize the Data and provide for meaningful risk management reports. When the data exercise is completed, the next step is to review management practices and policies to ensure that not only are risks monitored comprehensively but that early warning systems are in place to anticipate the development of unacceptable risk levels." ()

The report also noted current investigations into methods of recording client groups, the transfer of the Corporate Commitment Register onto the mainframe computer by 1 July 1989, and the investigation of a Global Risk Management System ("GRIMAS") to which information would be downloaded from other systems within the Bank Group.

5.5.2 GROUP RISK MANAGEMENT DIVISION

With effect from 1 July 1989, Mr Matthews was appointed Chief General Manager, Group Risk Management. At this date, the organisational structure of the Bank was changed() to recognise Group Risk Management as a separate division. In August 1989, Mr Guille was appointed General Manager, Global Risk Management, reporting to Mr Matthews. Although he was still Managing Director of Executor Trustee Australia Limited ("Executor Trustee") at this time, Mr Guille had already assisted Mr Matthews in the preparation of the report of large exposures in April 1989, and had presented the May 1989 Global Risk Management progress report to the Executive Committee. Mr Guille has estimated that while he was still Managing Director of Executor Trustee, he spent approximately 20 per cent of his time in the Global Risk Management role.() He resigned from Executor Trustee in May 1990.

With the creation of the new division, Mr Guille and Mr Matthews prepared and presented to the Executive Committee, and to the Board, a charter for the future direction of that division. This charter, which was noted by the Board on 27 July 1989, stated that:

". Global Risk Management (GRM) has responsibility for the development and monitoring of policies governing the assumption and management of risk in the State Bank Group.

. In discharging this responsibility, GRM will give priority to credit risk - in terms of credit exposures, credit approval, credit quality and management processes - and interest rate risk. GRM will also give attention to other risks, including capital adequacy, liquidity, technology and human resources risks.

. Specifically, GRM will:

- research, analyse and disseminate information on current and prospective risks facing the Group;

- investigate and review risk policies and procedures and recommend any changes;

- monitor the implementation and execution of approved risk policies;

- report on the maintenance of specific standards for credit exposure, credit quality and credit management;

- participate in and support asset and liability management processes in the Bank and the Group;

- specify a Global Risk Management Information System (GRIMAS) and ensure its proper maintenance and management;

- accept responsibility for the provision of risk related information to the Reserve Bank of Australia and other regulatory authorities and consult with these authorities as required.

. GRM will ensure full communication and consultation with other areas of the Group responsible for specific operational risk management.

. In addition, GRM will expect full co-operation with its investigations and reviews and to be advised and consulted on major divisional initiatives that may impact on the Group's risk profile." ()

The charter required that Global Risk Management should give priority to credit risk. This priority was confirmed by the business plan for Global Risk Management which formed part of the Bank Group's profit plan for 1990, which stated that, in developing a policy framework for the monitoring and reporting of risk, priority was to be given to credit risk and interest rate risk. In the case of credit risk, the focus was to be on exposures to client groups, industry risk and country risk.()

Despite the establishment of the Global Risk Management division, progress in obtaining data on a group-wide basis was slow. The ongoing problem of obtaining reliable management information was highlighted in January 1990, when the Reserve Bank questioned the loan approval statistics reported by the Bank to the Australian Bureau of Statistics. Subsequent investigation by Mr N Newman, Head of Risk Information Systems, revealed that:

(a) no supporting working papers could be found;

(b) for five months the figures had been estimated only, as the relevant computer reports had not been produced; and

(c) in the month of December 1989, some 94.7 per cent of approvals had been coded to "other" rather than a more meaningful purpose code.()

Mr Guille's response, in the form of a hand-written comment on Mr Newman's memorandum, was:

"If we are not capable of producing good reports to the Reserve Bank or ABS, we should either:

- cease reporting

- get the resources to do the job properly.

I favour doing the job properly. At present external reporting to RBA/ABS is unreliable and embarrassing."

The Executive Committee was informed at its meeting on 19 January 1990 that, although a "... preliminary investigation of exposure reporting for Beneficial Finance and Personal & Business Banking (particularly in the Commercial Lending area)" had been completed, it was "... very clear that Global Risk Management faces a substantial task to produce reliable management information on risks." ()

In February 1990, the Executive Committee endorsed the continuing development of the Corporate Banking Commitment Register as the basis for a group wide management information system for credit risk exposure. Mr Matthews was to issue a policy statement endorsing this system as "the sole determinate (sic) of group risk exposure." ()

The paper presented to the Executive Committee at this time indicates that a demonstration of the Commitment Register had been given. It was apparently not successful in identifying the overall risks of the loan portfolio. Mr Macky, former Chief Manager, Information Systems, described in his evidence to me the development of the Commitment Register and a demonstration of that system in late 1989 or early 1990, and said that a number of the Bank's senior managers criticised the system because, although it contained information needed by staff on a "week by week basis, recording what's happening on an individual account", it did not include information needed by Management "to get an overall snapshot picture of the whole of our corporate business." ()

Progress in other areas of the Bank was also slow. Treasury and International had developed their own LIMITS database system, the core of which was specific transactions. The argument advanced by Treasury and International was that, with a higher turnover of transactions, it was not efficient to run a system based on customers in that division. The data required for credit risk management reporting had to be extracted from this system, and manually input to the Commitment Register. It was anticipated that this process would commence by 30 June 1990.

By February 1990, Personal and Business Banking had completed a Project Benefit Analysis and had agreed to provide data for the system, with smaller exposures being aggregated for industry reporting purposes.

Beneficial Finance Corporation had also agreed initially to provide data on all exposures greater than $1.0M for facilities recorded on its loan processing system. It was anticipated that the uploading of this data would commence in March 1990.

A revised version of the Group Risk Management Charter was endorsed by the Executive Committee on 15 June 1990. This new charter again emphasised that individual business units were responsible for managing their own risks and that Group Risk Management's role was to overview the Group, ensuring that risks had been identified and understood and were being actively managed.

The new charter set seven key objectives for Group Risk Management which were not dissimilar from the tasks set in the original charter eleven months earlier:

"1. To define and identify sources of risk within State Bank Group.

2. To build and maintain comprehensive group risk reporting systems.

3. To investigate and review the portfolio allocation of Group assets and recommend policies and limits for maintaining adequate risk diversification.

4. To co-ordinate the development and maintain "Stewardship" of a comprehensive Risk Management policy framework within State Bank Group.

5. To facilitate risk management practices within all business units across State Bank Group, with a particular emphasis on education, policy development and risk review.

6. To regularly review and judge the effectiveness of risk management performance within individual business units of State Bank Group.

7. To maintain good working relationships with Governments and regulatory authorities on group risk related matters." ()

On 9 July 1990, Mr Guille wrote a memorandum to Mr Paddison outlining the business objectives and associated resource requirements of Group Risk Management arising from the new charter, and highlighting the continuing lack of information concerning the Bank Group's credit exposures as a whole, and the need for a more formal limits structure:

"Portfolio Imbalance

This issue is very much generic and fundamental to business survival.

At present the Group has a very poor understanding of the composition and risk profile of its asset portfolio. Business planning is not based on an overall portfolio allocation model and no formal limits structure is in place to guide asset growth. What is needed is a fresh approach to strategic planning and profit planning that provides a much more disciplined and structured approach to Group/global asset accumulation. Such an approach has as its starting point a clear focus on the risk/reward trade-offs in portfolio segments."

In October 1990, Mr Paddison presented to the Board the proposal for adopting a Group-wide prudential policy for large credit exposures.

It is clear that at February 1991 the Bank Group still did not have "comprehensive group risk reporting systems". It was not until late 1990 that information from parts of the Bank and Bank Group, other than Corporate Banking, was included on the Commitment Register.() The interface between the Commitment Register and Treasury and International Banking's LIMITS system was not completed until September 1991. At this time, off-shore exposures were still being manually updated on the LIMITS system. Automatic daily updating of the LIMITS system with New York, London and Auckland office exposure information was not completed until 1992.()

In their separate submissions to me in respect of the Bank Group's management of diversifiable credit risk, both Mr Clark and Mr Matthews accepted that the Bank's information systems were inadequate.

Mr Clark submitted that the principal responsibility for these inadequacies lies with Mr Matthews. Mr Clark's submission was, in substance, that:()

(a) In hindsight, Mr Clark accepted that the "facts now illustrate that there were inadequacies".

(b) As Chief Executive Officer, Mr Clark had "no option" but to delegate some aspects at least of the operation and responsibilities within the Bank. In this respect, it may be noted that sub-section 18(2) of the State Bank of South Australia Act 1983 expressedly allows the Chief Executive Officer to delegate "any of his powers or functions under this Act". Sub-section 18(3) provides that any such delegation does not "derogate from the powers of" the Chief Executive Officer. Neither, it may be added, does it lighten his responsibilities.

(c) Mr Clark delegated to Mr Matthews' the task of establishing systems for proper credit control. Mr Clark did so because he regarded Mr Matthews as being one of the most experienced bankers in the Group, had been the Chief Accountant of the Bank, and was regarded by Mr Clark as "being very conservative and ideal for risk management throughout the Group".

(d) Mr Clark believed that proper steps were taken within the Bank to monitor the Bank's industry exposures, including that to commercial property. Mr Clark's belief was based on assurances he received from his senior management. Mr Clark asserts that he was not informed of the concerns expressed by the Reserve Bank.

(e) Mr Clark also submitted that, although the Board of Directors may have "lacked the totality of information available because of inadequacies in the systems, they had adequate information about the exposure to property and as to various geographic segmentation." Mr Clark submitted that there was "an abundance of information available from the papers relating to the major loan approvals which could have provoked further enquiry. It is apparent that the Board did not make further enquiry."

In respect of Mr Clark's submission, I accept that the Chief Executive Officer must necessarily delegate some powers and functions in order to ensure the efficient management of the Bank. The State Bank of South Australia Act 1983 expressly provides for such a delegation. I also accept that Mr Matthews, a long term banker, was, on the face of it, an appropriate delegate to undertake the task of establishing systems for the management of the Bank Group's Credit Risk.

It is important, however, to recognise the distinction between the delegation of powers and functions, and the delegation of responsibilities. Sub-section 16(2) provides that the Chief Executive Officer, is subject to the control of the Board, responsible for the management of the Bank. While Mr Clark reasonably delegated the Group Risk Management Function to Mr Matthews, Mr Clark remained responsible for ensuring that such systems were implemented on an efficient and timely basis.

Mr Clark's submission in respect of the Board of Directors is telling in this respect. Mr Clark submitted that although the Board may have lacked the totality of information because of inadequacies in the systems, they had adequate information about the exposure to property, particularly from the papers relating to major loan approvals which "could have provoked further enquiry." If, as submitted by Mr Clark, such information was available to the Board of Directors, it would have been even more readily available to Mr Clark. It should have been apparent to Mr Clark, particularly from the frequent references at the Executive Committee meetings, that the development of adequate information systems to manage industry exposures was slow, and ineffective.

Mr Matthews submitted to me that the inadequacies in the Bank's Global Risk Management were principally the result of the complexity of the task of establishing adequate systems, and of the insufficient resources allocated to him to undertake the task. Mr Matthews submitted that:()

(a) Inadequate resources were devoted to the Group Risk Management function. A shortage of staff, in particular, greatly restricted the speed at which Mr Matthews was able to develop an effective system of all Risk Management. Although Mr Matthews spoke to Mr Clark on a number of occasions regarding the lack of resources and staffing, he received very little support.

(b) Development of the Group Risk Management System was hampered by a lack of co-operation from the various line divisions in supplying information. This problem was exacerbated by Mr Matthews lack of authority to give directions to the divisions to supply the necessary information.

(c) Establishing a Group Risk Management System was a complex and difficult task, which could not be achieved without adequate resources.

Although I accept that Mr Matthews task may not have been an easy one, he should and could have done much more to ensure that the Bank could at least have been in a position to accurately measure the risks that it faced, and to take action to manage those risks. Mr Matthews had long experience of banking, and had received repeated expressions of concern from the Reserve Bank. As a very senior officer in the Bank, he had in my opinion a responsibility to, and was in a position to, insist that adequate resources be devoted to the task of group risk management, and to bring forcefully to the attention of the Board of Directors any difficulties he may have perceived in undertaking that task.

5.5.3 SUMMARY

The principal aspects of the Bank's implementation of a system for the comprehensive monitoring and management of group-wide risk are:

(a) The need for a system to monitor and manage Bank-wide and Group-wide risks had been identified as early as March 1985, in the Bank's first strategic plan. The deficiency in the Bank's information system in respect of prudential policies was expressly stated in a report to the Executive Committee in October 1985. In September 1986, the Reserve Bank sought assurances from the Bank's Management regarding its control of the Bank's risk exposure. In March 1988, the 1988 strategic plan again identified the need for a monitoring and management system.

(b) Despite the recognition of the need for systems to manage Group risk, no action was taken until September 1988 with the establishment of a Group Risk Working Group.

(c) The first Group large client exposure report was presented to the Bank's Board of Directors in April 1989. The first report on Group industry exposures was not presented to the Board until January 1990.

(d) A specialised Group Risk Management division was established with effect from 1 July 1989 to implement systems to monitor group-wide risk. Mr Matthews, the Bank's former Chief General Manager, was appointed to head the new division.

(e) Progress in effectively monitoring the diversifiable credit risk of the Group was, however, slow, particularly in respect of reporting industry exposures because of the different classification systems used by various companies in the Group.

(f) The Group Risk Management system was not effectively implemented until far too late to have any real impact upon the management of the Bank Group before 1991.

(g) Although they may have been considered, no prudential policies relating to Group-wide credit risk were settled and implemented by the Bank's Board of Directors until October 1990. The policy related only to limits on exposures to clients and client groups.

 

5.6 CONCLUSIONS AND FINDINGS

 

5.6.1 CONCLUSIONS

Based upon the evidence reviewed by me in the course of my Investigation, my conclusions in respect of the Bank Group's management of the diversifiable credit risk associated with its asset portfolio are:

(a) Control of Group Exposures

(i) The policy adopted by the Bank's Board of Directors regarding the Bank's subsidiary companies was to allow the subsidiaries to operate independently, but subject to the Bank's ultimate control, principally through the appointment of the Bank's representatives to the subsidiaries' Board of Directors.

(ii) The Bank and its subsidiary companies operated essentially autonomously in establishing prudential policies to manage the diversifiable credit risk associated with their loan portfolios. Each subsidiary's Board of Directors established its own prudential policies, and management implemented arrangements to monitor and manage credit exposures for those subsidiaries.

(iii) No group policy was developed in respect of the Group's global credit exposure until October 1990, when the Bank's Board of Directors approved a group-wide policy regarding large client exposures. No Group policies were instituted by the Bank's Board of Directors in respect of the Group's exposures to particular industries, or to particular geographic areas.

(iv) The need for an effective system for controlling Group-wide risk was recognised from 1985, when the objective of establishing such a system was included in the 1985 strategic plan. There were repeated references to this need over the following three years. Despite this, no action was taken to implement centralised monitoring of the Group's credit risk exposures until September 1988. The Bank's Board of Directors was provided with reports showing Group-wide consolidated credit exposures to particular clients for the first time in April 1989, and Group-wide consolidated industry exposures for the first time, in January 1990.

(v) Even then, no action was taken to implement effective arrangements to control, as opposed to simply measure, Group-wide credit risk.

(vi) The absence of any effective system for the monitoring and control of the Group-wide credit risk exposure of the Bank Group was a serious deficiency in the Bank's management systems. The business activities of the Bank's divisions and subsidiaries, and of Beneficial Finance Corporation in particular, created a real risk that the Group might be over-exposed to particular borrowers, or over-exposed to particular industries, particularly property and construction, which represented a very significant proportion of the business of Beneficial Finance Corporation.

(b) The Bank's Large Client Exposures

(i) The Bank's Board of Directors approved, without amendment, proposals, as and when submitted by management, in respect of a prudential large exposure policy between July 1984 and July 1987. The Bank's Board of Directors did not further consider the large exposure policy until October 1990, when a policy submitted by management to limit Group-wide risk was approved.

(ii) In October 1989, the Corporate Banking manual increased the maximum amount which could be lent to a client or client group to $250.0M. The increase in the dollar value of maximum exposures was not reviewed by, or approved by, the Bank's Board of Directors.

(iii) The Bank's prudential policies regarding large client exposures, as they were approved from time to time, were broadly within the prudential guidelines established by the Reserve Bank of Australia. The Bank's policies did, however, provide for a general limit of 20 per cent of the Bank's capital (the Reserve Bank defined exposures in excess of 10 per cent as large exposures, and required them to be reported), and allowed for the Board to approve larger exposures, including exposures undertaken on the basis of a capacity to subsequently sell down the exposure.

(iv) The monitoring and reporting of the Bank's large exposures was inadequate. It included only the exposures of the Corporate Banking division, and did not include client exposures of any other divisions of the Bank. The large exposure reports provided to the Board of Directors were clearly limited to the large exposures of the Corporate Banking division.

(v) Although the reporting was inadequate, the evidence available to me is that the large client exposures of the Bank were generally within the prudential policy limits of the Bank.

(vi) The Bank's large client exposures increased very rapidly in size after 1984. The rapid increase in the Bank's capital base, particularly in 1987, and the changes to Prudential Guideline E1 in August 1989 to the measurement of capital for large exposure reporting purposes, ensured that the Bank's large exposures remained within prudential limits. The Reserve Bank's quarterly review of the Bank's large exposures noted that, although the level of those exposures exceeded that of other banks in 1986, that level had reduced to below the average of other banks by 1990.

(c) Beneficial Finance Corporation's Large Client Exposures

(i) The Beneficial Finance Corporation Board of Directors established prudential policies allowing credit exposures of up to 30 per cent of Beneficial Finance Corporation's capital base to a client or client group.

(ii) Beneficial Finance Corporation's large exposures increased very significantly in size after 1984, reflecting the changing nature of its business, its increasing capital base, and the higher prudential policy limit for large exposures.

(iii) The monitoring and reporting of Beneficial Finance Corporation's large client exposures was, on the evidence available to me, adequate.

(iv) Beneficial Finance Corporation did, on occasion, extend credit facilities which exceeded its own prudential limit of 30 per cent of capital.

(d) The Bank's Industry Exposures

(i) The prudential policy established by the Board of Directors in July 1984 remained in place without review or amendment throughout the period covered by my Investigation.

(ii) The monitoring and reporting of the Bank's industry exposures was totally inadequate, since it extended only to the industry exposures of the Corporate Banking division. No monitoring or reporting of the industry exposures of other divisions of the Bank was undertaken. This inadequacy of the Bank's monitoring and reporting of its industry exposures was potentially serious, particularly having regard to the rapid increase in the proportion of the corporate loan portfolio represented by exposures to the property development and construction.

(iii) The inadequacy of the Bank's industry exposure reporting was clearly apparent from the Monthly Operating Review provided to the Board of Directors. This Report related only to the industry exposures of the Corporate Banking division.

(iv) The absence of any monitoring and reporting of the industry exposures of the Bank's divisions, other than Corporate Banking meant that the Bank's compliance with its own prudential policy (maximum exposure of 20 per cent of total risk assets) could not be monitored.

(v) By 30 June 1989, the exposure of the Corporate Banking division to property development was 31.8 per cent of its portfolio, the exposure of Corporate Banking to commercial property having almost doubled over that at June 1988. The proportion of the Bank's total risk assets that were property-related was unknown.

(vi) The proportion of the Corporate Banking portfolio related to property in June 1989 was imprudent, particularly in circumstances where the exposure of other divisions was unknown.

(vii) The Reserve Bank raised, at regular intervals, concerns regarding the Bank's, and Beneficial Finance Corporation's, exposures to commercial property. There is no evidence of any action being taken by the Bank in response to these concerns from the Reserve Bank. To the contrary, the Corporate Banking exposure to commercial property increased by $1,008.6M in the year ended 30 June 1989.

(e) Beneficial Finance Corporation's Industry Exposures

(i) Beneficial Finance Corporation did not have a formal prudential policy limiting either the exposure of the company to commercial property generally, or to important segments of the commercial property market, such as construction and development, and tourist resorts. This was a serious deficiency in the company's policies, since it meant that the company did not have any prudential limitations restricting its expansion into lending for commercial property development projects.

(ii) The absence of prudential limits allowed the company's exposure to larger commercial property developments to increase without any limit or prudential constraint. By September 1990, the exposure of Beneficial Finance Corporation to commercial property was about 60 per cent of the loan portfolio. That exposure was in my opinion imprudent and excessive.

(iii) The reporting of Beneficial Finance Corporation's industry exposures to the Board of Directors did identify the total property exposure of the group's risk portfolio.

 

5.7 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

 

In respect of the Terms of Appointment relevant to the Management of the diversifiable credit risk of the Bank, Bank Group, and Beneficial Finance Corporation I report as follows:

5.7.1 TERMS OF APPOINTMENT A

Among the matters and events that caused the financial position of the Bank and the State Bank Group as reported by the Bank and the Treasurer in public statements on 10 February 1991 and in a Ministerial Statement by the Treasurer on 12 February 1991 was the imprudent and excessive exposure of the Bank Group to commercial property construction and development. The exposure exceeded 30 per cent of total risk assets.

The matters and events which caused the imprudent and excessive exposure were:

(a) The failure of the Bank to implement any system to monitor its own exposure to commercial property.

(b) The failure of the Bank to implement any system to monitor the Bank Group's exposure to commercial property.

(c) The rapid increase in the Bank's lending for commercial property during the year ended 30 June 1989, resulting in 31.8 per cent of the Corporate Banking portfolio being exposed to commercial property.

(d) The failure of the Beneficial Finance Corporation Board of Directors to establish an adequate prudential policy to limit its exposure to commercial property.

(e) The excessive exposure of Beneficial Finance Corporation to commercial property of about 60 per cent of its risk portfolio.

5.7.2 TERM OF APPOINTMENT C

(a) The Bank Board of Directors failed to adequately or properly supervise, direct and control the operations of the Bank and the Bank Group in that the Board:

(i) Accepted, without adequate questioning, reports regarding the Bank's industry exposures which were clearly limited to the exposures of the Corporate Banking division, and which were therefore inadequate to enable the Board to monitor compliance by management with the prudential policy approved by the Board in July 1984.

(ii) Failed to review and amend the Bank's industry exposure policy after 1984 in the light of Beneficial Finance Corporation's large exposure to property.

(iii) Failed to take adequate steps to ensure that the Bank Group's exposure to particular industries, and particularly commercial property, were monitored or controlled. The Board of Directors should have required that the exposure of the Bank Group was monitored because:

. The need for such monitoring was identified in the 1985 strategic plan approved by the Board in March 1985, and was expressly identified as a deficiency in the Bank's systems in the 1988 strategic plan and in minutes of the Executive Committee meetings provided to the Board.

. The Bank was, as a matter of commercial reality, bound to support its subsidiary companies, and so the exposures of the subsidiaries had a clear capacity to have a direct impact upon the Bank.

. The Board of Directors knew, or ought to have known, that Beneficial Finance Corporation was heavily exposed to commercial property. Such information was available at least from the common directors, and in, general terms, from Beneficial Finance Corporation's Annual Reports.

. The Board of Directors knew that the Bank and Beneficial Finance Corporation were rapidly expanding their loan portfolios, which raises the obvious risk that both may be seeking lending opportunities in expanding market segments, such as commercial property.

(b) The Chief Executive of the Bank, Mr T M Clark, failed to adequately or properly supervise, direct and control the operations, affairs, and transactions, of the Bank, in that the Chief Executive:

(i) Failed to take adequate action to ensure that an effective system for monitoring the Bank's exposure to commercial property was established, even when the Bank's exposure increased dramatically during 1989.

(ii) Failed to take adequate action to ensure that a system was established to monitor the Bank Group's exposure to commercial property, even when the exposure of the Corporate Banking division was increasing rapidly during 1988 and 1989.

(iii) Failed to review the Bank's prudential policy regarding industry exposures in view of Beneficial Finance Corporation's large exposure to commercial property (Mr T M Clark was a director of Beneficial Finance Corporation).

(iv) Failed to provide to the Board of Directors information which was adequate to enable the Board to monitor the Bank's compliance with its prudential policy regarding industry exposures.

(v) Failed to take any action to address the real and obvious risks associated with the Bank's high level of lending for commercial property during 1989, when he knew (as a Director of Beneficial Finance Corporation) that Beneficial Finance Corporation had a large exposure to commercial property.

(vi) Failed to take any action to ensure that the prudential policy regarding industry exposure as adopted by the Board was complied with by the Bank.

(c) The operations, affairs, and transactions, of the Bank were not adequately or properly supervised, directed, and controlled, by Mr K S Matthews, who was Chief General Manager of the Bank from 1986 to 1988, and from 1 July 1989, was Chief General Manager Group Risk Management, in that Mr K S Matthews:

(i) Despite having been given responsibility in August 1988 to develop and implement, a system to monitor Bank-wide and Group-wide risk, Mr K S Matthews did not ensure that the development of essential systems occurred in a timely manner. Mr K S Matthews could have, and should have, insisted that adequate resources were allocated to developing such systems (refer also (ii) hereunder).

(ii) Failed to ensure that the Board of Directors was informed of the dangers associated with the absence of Bank-wide and Group-wide risk management systems. (Mr K S Matthews attended Board meetings during the relevant period). This was particularly important if the development of such systems was hampered by a lack of resources.

(iii) Failed to take steps to develop prudential policies to be adopted by the Bank Board to manage risk on a Group basis.

(iv) Failed to take any positive action in response to repeated expressions of concern by the Reserve Bank regarding the Bank's and Bank Group's exposure to commercial property.

(d) The operations, affairs, and transaction, of Beneficial Finance Corporation were not adequately or properly supervised, directed and controlled by:

(i) The Directors of Beneficial Finance Corporation,in that they failed to ensure the establishment and observance of any formal prudential policy in respect of the company's exposure to commercial property, even though it expressly recognised the need for such a policy.

(ii) Mr J A Baker, the Managing Director of Beneficial Finance Corporation, in that Mr J A Baker failed to take adequate steps to ensure that the exposure of Beneficial Finance Corporation to commercial property was:

. subject to any prudential limit; or

. otherwise managed or controlled within prudent limits.

5.7.3 TERM OF APPOINTMENT D

The information and reports given by the Chief Executive Officer and other Bank officers to the Bank Board were:

(a) Not adequate.

(b) Not sufficient to enable the Board to discharge adequately its functions under the Act, because:

(i) The industry exposure reports contained information only in respect of the exposure of the Corporate Banking division, and did not include information regarding other divisions.

(ii) Accordingly, the reports did not enable the monitoring of compliance with the Bank's prudential policies.

(iii) The reports did not include any information regarding the Bank Group's industry exposures.

 

5.8 APPENDIX

 

CHRONOLOGY OF EVENTS AND POLICIES RELATING TO
THE MANAGEMENT OF THE CONCENTRATION OF CREDIT RISK

DATE	EVENTS	POLICIES
07.84	Mr Byrnes' paper to Executive Committee emphasises need to monitor actual exposures against prudential limits.	Maximum client exposure set at 20 per cent of capital base ($28.0M). Industry limit set at 20 per cent of risk assets.
11.84		First geographic limits set. Total exposure to overseas banks not to exceed $600.0M ($300.0M direct advances and $300.0M contingent exposure.)
01.85	"Prudential Supervision of Banks" issued by Reserve Bank.
02.85		A client group defined as being on the premise of 40 per cent or greater ownership. 20 per cent of shareholders' funds redefined as $33.0M. Exposures up to 30 per cent of shareholders' funds to be allowed for "blue chip" corporate groups. Larger exposures may be taken on if: .will be sold down within six months; or .extenuating factors warrant a "one-off" decision.
03.85	1985 Strategic Plan sets a five year objective of enhancing management information to provide extended customer and industry exposure reporting. Also notes need to maintain data processing compatibility across the Group.
06.85	Quarterly Operating Review starts to include Corporate Banking exposures by industry.
07.85	1985-1986 Profit Plan comments more work needed on industry and country risk.	Maximum exposure to any client raised to $40.0M, no other changes. Total off-shore exposure limit raised to $700.0M ($350.0M direct advances and $350.0M contingent exposure).
08.85		Total off-shore exposure limit raised to $1,100.0M ($600.0M direct advances and $500.0M contingent exposure).
10.85	Background paper for Reserve Bank meeting cites main problem area as management information systems. Notes need to computerise and centralise exposure monitoring of customer and country limits and establish group-wide system for recording industry exposures. Paper presented to Executive Committee.
12.85		Separate New Zealand exposure limit policy established as: .New Zealand assets limited to 5 per cent of Bank's total assets; .contingent exposure limited to 5 per cent of Bank's risk assets; and .Board approval required for above totals to exceed $200.0M and $100.0M respectively.
06.86	"Supervision of Banks' Large Credit Exposures" issued by Reserve Bank.
07.86	"Proposed Format and Guidelines for Submissions to the Lending Credit Committee" issued which requires inclusion of the Group exposure to the customer.	Off-shore exposure limits redefined as: .direct, contingent and Swap exposure limits (excluding New Zealand) each set at 20 per cent of total Bank assets; .New Zealand direct, contingent and Swap exposures each limited to 5 per cent of total Bank assets.
09.86	Meeting with the Reserve Bank at which Mr Clark and Mr Matthews comment on need to improve credit control and management information systems.
10.86	Joint Board/Executive Conference. Mr Matthews presents a paper on the Reserve Bank's approach to supervision and its prudential guidelines.
01.87	Reserve Bank requests prior notification of Bank's intention to enter into exceptionally large exposures.
07.87		General maximum exposure to any client increased to $60.0M. Absolute limits set at $100.0M for a single entity and $150.0M for a group.
09.87	Mr Matthews requests that Corporate Banking take responsibility for maintaining records of client exposures and arrange for other divisions to report to them.
03.88	1988-1993 Strategic Plan emphasises that planned expansion will require high priority to be placed on management of concentration of credit risk.
07.88	Need for greater emphasis on Global Risk Management raised at Executive Committee meeting.
08.88	Mr Matthews presents paper on risk to Executive Committee and is allocated responsibility for risk management. Agreement reached with divisions and subsidiaries to record files to Australian Standard Industrial Classifications.
10.88	Global Risk Management progress report made to Executive Committee. A working group has been formed to determine best systems approach. Fourteen common Bank and Beneficial Finance Corporation clients identified.
11.88	Meeting with Reserve Bank at which Reserve Bank expressed concern over rapid growth and increased involvement in property market.	New Zealand country limit increased to 15 per cent of Bank's balance sheet as a result of the acquisition of Security Pacific Bank New Zealand Limited.
02.89	Global Risk Management progress report made to Executive Committee. Board system structure identified and input specifications complete. Problems in obtaining appropriate and consistent information from divisions and subsidiaries noted.
03.89	Mr Masters review of property exposures highlighted increased projected vacancy rates in Sydney, Melbourne and Adelaide.
04.89	Global Risk Management's first report of large exposures presented to the Board.
05.89	1990-1994 Strategic Plan set targets for monthly reporting under Global Risk Management System and the aggregation of client exposures across all Group members by the end of 1989. Global Risk Management progress report to Executive Committee commented on urgent need for common terminology and systems across Bank Group. Corporate Commitment Register to be on mainframe by 1 July 1989.
07.89	Reserve Bank require reporting of large exposures on a consolidated group basis. Mr Matthews appointed Chief General Manager, Group Risk Management. Charter of new division approved by Board. Format of Operating Reviews changed. Level of reporting of industry and geographic risk significantly decreased.
08.89	Mr Guille appointed General Manager, Global Risk Management. Report of large exposures at 30 June 1989 presented to Board.
09.89	1989-90 Profit Plan gives priority to the monitoring and reporting of credit and interest rate risk.
10.89	Mainframe Commitment Register implemented in Corporate Banking.
11.89	Report of large exposures at 30 September 1989 presented to Board.
01.90	Progress report made to Executive Committee. Global Risk Management now has three sections: . Risk Information Systems; . Risk Management; and . Credit Policy.
02.90	Mr Newman identifies inaccuracies in reporting to Australian Bureau of Statistics following a query from Reserve Bank. Executive Committee endorses Commitment Register as a basis for Group-wide credit risk management. Personal and Business Banking and Beneficial Finance Corporation have agreed to provide data. Report of large exposures and industry exposure at 31 December 1989 presented to Board.
04.90	Global Risk Management Exposures Report as at 31 March 1990 presented to Executive Committee. Agreed report was too long (100 pages) and detailed. Proforma to be presented at next meeting. Limits system implemented in Treasury and International Banking.
05.90	Reporting format approved. Certain definitions adopted for reporting purposes.
06.90	Revised Group Risk Management Charter approved by Executive Committee.
07.90	Mr Matthews retires. Mr Guille appointed General Manager, Group Risk Management, reporting to Mr Paddison. Mr Guille confirms to Mr Paddison that Group still has poor understanding of composition and risk profile of asset portfolio.
08.90	Interface between Commitment Register and Beneficial Finance Corporation system completed to record exposures over $1.0M.
10.90	Report of large exposures and industry exposure at 30 September 1990 presented to Executive Committee and Board. Recording of Commercial and Rural Banking exposures on Commitment Register.	Concept of Prudential Customer Exposure Ceilings approved by Board.
12.90	Revised Global Risk Management reporting package design and principles endorsed by Executive Committee.
02.91	Interface between Commitment Register and Beneficial Finance Corporation system modified to include all exposures over $0.25M. Management of Corporate and International Banking instructed to perform a full review of all client details recorded on the Commitment Register and Limits system.
09.91	Automatic interface between Commitment Register and Limits system implemented.
10.91	Beneficial Finance Corporation exposures of less than $0.25M included on Commitment Register, but only on an aggregate industry basis.