It also had technical failures and insufficient monitoring of liquidity, and some problems dragged on for years.
The RBNZ qualifies its criticism by saying Westpac's NZ’s financial position is sound.
But it was worried enough to commission an independent report by the international consultancy Oliver Wyman in March.
It based this on what it called material shortcomings in risk governance processes and practices applied by the Westpac NZ Board and executive management.
The report by Oliver Wyman, confirmed that these concerns were well-founded.
“In short, the risk governance of Westpac NZ’s Board needs to see significant improvement,” Deputy Governor and General Manager of Financial Stability Geoff Bascand says.
“The report’s findings highlighted material risks to effective risk governance and noted that the role played by the Board fell short of the standard expected of an organisation of the bank’s scope and scale.”
In some cases, issues that had been acknowledged by the Board for several years had not received due attention or effective remediation.
“The report found there had been historic underinvestment in risk management capabilities at the bank with investment appearing reactive, rather than strategic.”
Bascand said Westpac NZ had made progress towards implementing the Review’s recommendations, but there was a lot more work to do.
“We expect Westpac NZ to prioritise remediation in line with the report’s recommendations and will be closely monitoring their efforts to ensure that they are effective.”
In referring the matter to Oliver Wyman, the RBNZ spoke of “ongoing compliance breaches and technology issues including material failures to report liquidity correctly, capital models breaches and significant technology outages.”
During its investigation, Oliver Wyman interviewed over 50 current and former directors and staff, observed 10 Board, Board committee and Executive committee meetings over a period of three months and reviewed over 900 documents.
It found the independent Non-Executive Directors collectively did not have sufficient expertise in the critical areas of banking, risk management, and banking technology to satisfy the requirements of their position.
As a result, they were not able to engage with and provide robust challenge to the executive on questions of risk, and generally trusted the executive too much.
The Board also failed to address the bank's appetite for risk and tolerated sustained periods of risk without any sense of urgency, challenge, or debate.
Where risk was identified, it was often dealt with in a siloed manner without effective consideration of synergies or interdependencies. This resulted in over-stretched resources and recurring extensions of deadlines.
The Oliver Wyman report called for the board to be augmented with independent directors with banking experience and noted Westpac had already moved on this matter.
In presenting the Oliver Wyman report, Bascand sounded a further warning.
“The findings are a timely reminder for other regulated entities to consider their own risk governance practices,” he said.
“(This is) ahead of the cross-sector thematic review on governance being conducted in 2022 by the Reserve Bank in partnership with the Financial Markets Authority.”
Westpac NZ says it accepts the findings of the risk governance review and says it is well advanced in addressing recommendations in the report.
Westpac NZ Board chairperson Pip Greenwood, she agrees strong risk governance and a strong risk culture are fundamental requirements for banks.
“We have always aimed for high standards of risk governance but acknowledge that in the instances identified we fell short,” Greenwood said.
Greenwood said since the review began, a new chair and six new highly experienced and skilled directors had been appointed to the Westpac NZ Board.
“We have also followed up immediately on other recommendations in the report, including restructuring committees and overhauling the way information on risk is provided to the Board.”
Westpac NZ had also significantly increased investment in risk management in recent years.