The prudential watchdog has advised the banks now is the time to use some of their capital buffers to keep up ongoing lending to the economy.
APRA has made the call as the federal government and RBA have committed to investing up to $15 billion to enable smaller lenders to continue lending to consumers and businesses.
Over the past decade, the Australian banking system has built up its capital buffers, with Common Equity Tier 1 (CET1) capital reaching $235 billion at the end of 2019.
As a result, banks are typically maintaining capital levels well above the minimum regulatory requirements.
The regulator has told the banks that given the “prevailing circumstances, it envisages they may need to utilise some of their current large buffers to facilitate ongoing lending to the economy.”
APRA added this is especially the case for banks taking advantage of the new facilities being provided by the RBA.
Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, the regulator has said it would not be concerned if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19.
APRA chair Wayne Byres said even if the banking system utilises some of its current large buffers, it will still be operating comfortably above minimum regulatory requirements.
“APRA has been pursuing a program to build up the financial strength of the system for many years, when banks had the capacity to do so,” Mr Byres said.
“As a result, the Australian banking system is well capitalised by both historical and international standards.
“APRA’s objective in building up this capital strength has been to ensure it is available to be drawn upon if needed in times such as this.”
APRA set benchmark capital targets for banks to enable them to be regarded internationally as unquestionably strong, as a result of a recommendation from the 2014 Financial System Inquiry.
The benchmarks are well above current minimum regulatory requirements – for the big four banks, it equated to having a CET1 ratio of at least 10.5 per cent of risk-weighted assets. A lower benchmark has applied for the smaller banks.
A lower benchmark applies for smaller banks, in comparison, the actual CET1 ratio of the banking system by the end of 2019 had reached 11.3 per cent.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].