APRA is set to update its guidance asking the banks to freeze dividends next week, with the regulator’s chair stating his body will be acting to avoid creating a “capital cliff-face”.
Speaking on a Trans-Tasman Business Circle webinar, APRA chair Wayne Byres said while the degree of uncertainty around the domestic economy has reduced since the regulator asked banks to hold back on dividends in April, there is still a “strong case for prudence”.
“We will modify the guidance, and extend it for the remainder of this calendar year, shifting from the immediate, short-term emergency response in April to a setting with a somewhat longer-term outlook,” Mr Byres said.
“Our goal is to combine [ongoing] prudence with flexibility: that is, to ensure capital management practices clearly have regard to the continuing uncertainty in outlook, that stress scenarios can be overcome without having to resort to cutting business activity, and that regulated firms are not unduly constrained from raising capital if and when needed.”
Many of the initial emergency support measures for COVID-19 had a six-month timeframe, that was set to expire in or around September.
But as the JobKeeper program has been extended, Mr Byres said the regulator is looking into transitioning the financial services sector away from needing support.
The outlook remains difficult, he said, despite projections suggesting the situation will play out better than expected.
“Clearly, no one had any interest in falling off a cliff,” he said.
“But equally temporary support measures can’t go on indefinitely.”
APRA had nudged the banks to use their capital reserves to dampen the impacts of COVID-19 for the economy, lifting regulatory requirements.
Mr Byres said however, there is uncertainty around how quickly the buffers, once tapped into, may need to be rebuilt.
“It is difficult to be precise on this point, but I want to be clear we have no intention of creating a capital cliff-face that banks or insurers need to rapidly climb,” he said.
“As we have done in the past, our approach will be to allow banks and insurers to rebuild (to the extent any rebuild is even required) in an orderly manner, and in a way that doesn’t unnecessarily constrain activity or economic growth.”
In addition to the incoming capital management update, the regulator has also extended its temporary and concessionary capital treatment to the banks, for their six-month loan deferrals until the end of March.
Based on preliminary APRA data for the end of June, about 10 per cent of loans in the banking system ($269 billion) have had repayments deferred.
According to Mr Byres, the regulator’s stress testing has shown the banking industry is well placed to withstand economic headwinds ahead.
Superannuation funds had also responded rapidly to the early release scheme, while supporting capital raisings in the corporate sector.
Mr Byres commented prudential supervisors have an “important role to play in limiting the downside”.
“We cannot avoid or hide from the long-run impact of a shock, but macro- and microprudential measures can assist in making the adjustment process more orderly and limit unnecessary costs,” Mr Byres said.
“In the same way that governments and health professionals have sought to flatten the curve of new infections, the challenge from an economic and financial perspective is to find a way to reduce the speed and depth of the contraction, as doing so is also likely to minimise its longer-term damage.”
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].
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