The banking regulator has slammed Commonwealth Bank as being complacent and blinded to threats in its business as profits continued to roll in.
In a report labelled "damning" by federal treasurer Scott Morrison, the Australian Prudential Regulation Authority on Tuesday called out the country's biggest bank for "a widespread sense of complacency" and being insular.
APRA carried out its inquiry following a series of crises at CBA, including alleged breaches of money laundering laws, misconduct by financial advisers and the selling of junk insurance.
"CBA's continued financial success dulled the senses of the institution," APRA said.
"A widespread sense of complacency has run through CBA, from the top down."
APRA said community trust in Australia's banks had been "badly eroded" and CBA had failed to meet expectations and "fallen from grace".
"Regaining community trust will require time, hard work and an undistracted risk and customer focus," the report said.
CBA CEO Matt Comyn admitted the bank has been "defensive" and "legalistic" and said the report was confronting, as he also opted to forego a $2.2 million short term bonus.
"It is what we needed to hear," Mr Comyn told reporters on Tuesday.
"At times we have been defensive, legalistic. We've been perfunctory in some of our actions.
"I'd like to think we are making progress on that front now, but again that is something that needs to be demonstrated through our actions."
APRA has ordered the lender to hold an extra $1 billion in regulatory capital reserves, among 35 recommendations handed down.
The regulator found cultural issues at CBA including "a widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning from experiences and mistakes".
Mr Morrison said APRA's report was "required reading" for every financial executive and also said he expected further departures at CBA.
"My understanding is there will be others who will be leaving and that's what I expect to happen," he said.
CBA's board and senior executives were criticised for having inadequate oversight in dealing with non-financial risks, unclear accountabilities and a lack of ownership of key risks.
The regulator recommended executives face financial penalties over failures and called for a more active approach in identifying and addressing risks.
CBA was also accused of fostering a work environment that stifled opportunities to speak out about risk concerns.
The bank has signed an enforceable undertaking under which its response to the APRA report will be monitored by an independent party.
Mr Comyn said CBA would be able to apply for a partial removal of the increased capital reserve when it had made progress, but the increased burden will have no affect to customers or reduce CBA's appetite for lending.
"We won't be judged on what we say today, we will be judged on our actions and the success of which we are able to implement those recommendations and the experience of our customers and broader stakeholders," Mr Comyn said.
Despite the report Commonwealth Bank shares were 1.9 per cent higher in afternoon trade, to $73.19 at 1552 AEDT, as part of a general rise for the banking sector on the ASX.
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