In a speech delivered as part of the AB+F Randstand Leaders Lecture Series, APRA chair Wayne Byres said while Australian banks appear to be adequately capitalised against the Basel III capital requirements, a note of caution is still necessary.
“If the system doesn’t have sufficient resilience to quickly bounce back from shocks, its risks compounding the shocks being experienced,” said Mr Byres.
Based on stress tests performed on the banks by APRA this year, which project how the banks would perform in a hypothetical stress scenario, Mr Byres said almost all Australian banks could be severely constrained in paying dividends or bonuses in a severe downturn.
Mr Byres said the scenario tested by APRA would have seen some banks forced to convert Additional Tier 1 instruments as losses began to mount.
In such a scenario he said it is “unlikely that Australia would have the fully functioning banking system it would like in such an environment”.
“Banks with substantially reduced capital ratios would be severely constrained in their ability to raise funding (both in availability and pricing), and hence in their ability to advance credit,” he said.
“In short, we would have survived the stress, but the aftermath might not be entirely comfortable.”
Mr Byres said Australia must ensure the system has a “solid starting point through strong capital management and a focus on prudent capital buffers, allowing a margin that can be utilised in stress as the Basel framework intends, but without sailing too close to the wind by trimming these buffers to the lowest possible level of sufficiency”.
He also believes the potential exposure of banks to stress should also be limited.
He argued that appropriate lending standards and risk settings are necessary to ensure the risk that is taken on is well understood and appropriately managed.
Ensuring recovery plans are credible, Mr Byres said, was also vital.
He believes the banking system needs a “realistic and continuously reviewed menu of actions that can be practically implemented even in stressed operating conditions, bearing in mind that others may well be seeking to undertake the same actions at the same time”.
“APRA has been focusing on all of these areas in recent years, and dialling up the intensity of its supervision on each,” said Mr Byres.
“If we draw one conclusion from the stress test this year, it’s that there remains more to do to be able to confidently deliver strength in adversity,” he said.
