News: NAB UPDATE 1-Australian banks may be forced to keep extra capital due to risk 'blind spots' -...

(Adds APRA quote, CBA context)

Australia's financial regulator said on Wednesday bank managers were doing a poor job of assessing their own performances and warned they may face stricter external scrutiny and higher capital requirements unless they improved internal oversight.

The warning from the Australian Prudential Regulation Authority (APRA) suggests cultural factors which led to a money-laundering scandal at the country's top lender, Commonwealth Bank of Australia (CBA) , are endemic across the industry.

It also suggests heightened scrutiny of the country's finance industry is not over after a year-long public inquiry into the sector found top-to-bottom flaws in governance and was highly critical of management.

"Although the self-assessments raised no concerns about financial soundness, they confirmed our observation that industry is grappling to manage non-financial risks, such as culture and accountability," APRA Deputy Chair John Lonsdale said in a statement.

"In a number of cases, the weaknesses identified in the self-assessment were sufficiently material that APRA is considering stronger supervisory responses, including the application of an operational risk capital overlay," Lonsdale added.

Some of the banks' self-assessments had achieved insights but those "relating to the effectiveness of boards and senior leadership were notably less critical", APRA said.

"This raises the question of whether boards and senior management have a potential blind spot when it comes to assessing their own effectiveness," it added.

APRA would write to all boards seeking their assurance that they would address such weaknesses as a priority. It did not specify which companies were involved nor how much extra capital APRA could require them to set aside.

The regulator last year forced the country's biggest lender, Commonwealth Bank of Australia (CBA) , to keep an extra A$1 billion ($688 million) in reserve after it was accused of enabling thousands of breaches of anti-money laundering laws.

In the wake of that scandal, APRA analysed the self-assessments of 36 of Australia's top banks, insurers and superannuation licensees in relation to their corporate governance, accountability and culture.

($1 = 1.4545 Australian dollars)