In this article, we detail the repercussions faced by Macquarie Bank (MBL) after multiple breaches of APRA's prudential and reporting standards between 2018 and 2020. These breaches stem largely from the group's incorrect treatment of specific intra-group funding arrangements. Specifically, MBL reported intra-group funding as stable despite provisions that allowed these funds to be withdrawn in a period of financial stress, thereby understating the amount of risk capital it is required to hold. As a result, APRA has increased the group's capital requirement by $500 million and will require a 15% add-on to net cash outflows in the liquidity coverage ratio.

This regulatory action has brought into question MBL's risk management practices, prompting APRA to require MBL to resubmit and restate selected regulatory returns. The malpractice identified by APRA directly impacted both MBL's liquidity coverage ratio (LCR) and operational risk regulatory capital (ORRC).

The LCR requires authorised deposit-taking institutions (ADIs) to hold high-quality liquid assets (HQLA) equivalent to at least 100% of net cash outflows over a 30-day stress period. ORRC is a component of the APRA capital adequacy requirements, first implemented through Basel II in 2007. Specifically, MBL has received approval from APRA to operate under the APS 115 advanced measurement approach (AMA).

Indeed, the broad purpose of implementing Basel III accords by APRA was to beef up the strength and stability of the financial system in shock scenarios, however, this often comes with the trade-off of reduced profitability and efficiency in the broader banking industry. This dynamic applies to both the LCR and the ORRC, as each of these regulations requires banks to hold idle funds that could otherwise be used for income-generating activities

Macquarie has committed to immediate efforts to realign its risk management practices with APRA's requirements.

The recent disciplinary action taken by the Australian Prudential Regulation Authority (APRA) against Macquarie Bank Limited (MBL) is not rooted in concerns over the bank's financial stability but rather its failure to comply with operational risk requirements. Specifically, APRA found that MBL had breached regulatory standards by improperly including intra-group loans in its liquidity coverage ratio (LCR) calculations, a practice that made up 10-15% of the bank's total funding. To address the issue, MBL promptly removed all intra-group loans from its LCR calculations and restarted its historical dating. While APRA recognized that the misconduct was historical and did not pose an immediate threat to stability or liquidity, the regulator remains concerned about MBL's broader risk management practices and its ability to calculate and report key prudential ratios.

In response to APRA's action, MBL has expressed its commitment to ensuring full compliance with regulatory standards, as evidenced in its most recent Basel III Pillar 3 capital disclosures. The bank has implemented a robust risk management framework that uses a "three lines of defense model", assesses both financial and non-financial risks and undergoes extensive stress testing through scenario analysis. MBL states that it will work closely with APRA to ensure its full adherence to the operational risk framework.

Despite MBL's efforts to address the issue, further regulatory breaches may impede the bank's progress. APRA's tightened supervision of MBL and increased internal reporting requirements make it difficult to determine the extent of MBL's compliance with regulatory standards fully. If future breaches do arise, the bank may face further disciplinary action from APRA. MBL immediately faced APRA's $500 million capital buffer adjustment and a 15% cash outflow increase, and it also permanently removed intra-group loans from LCR calculations. However, the bank will still need to demonstrate continued commitment and adherence to rigorous regulatory standards to prevent further disciplinary action.

You have been tasked with rewriting the aforementioned text while utilizing better vocabulary and natural language. The entire output must be in English and unique.

The Macquarie Group's approach towards risk management can be found in its official report for 2021, which is available on its website. To adhere to the prudential and reporting standards for authorized deposit-taking institutions, Macquarie Group complies with APS 115 and APS 220, which are overseen by the Australian Prudential Regulation Authority (APRA).

Recently, Macquarie Group was subjected to a fine and a capital buffer of $500m due to multiple breaches of regulatory standards. These breaches were reported by Aleks Vickovich in an article published in the Australian Financial Review in 2021.