APRA remains in a low risk bubble, according to their paper today, which keeps the counter-cyclical buffer at 0. However they flag that may change ahead. I have to say this seems perverse, given the high debt levels and low economic performance and increased risks. Plain weird, and a million miles off the Reserve Bank NZ’s approach.
The Australian Prudential Regulation Authority (APRA) has decided to keep the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs) on hold at zero per cent, but has flagged the likelihood of a non-zero default level in the future.
The CCyB is an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk. It has been set at zero per cent of risk-weighted assets since it was introduced in 2016.
In its annual information paper on the CCyB, APRA today confirmed it considers that a zero per cent CCyB remains appropriate at this point in time based on an assessment of the systemic risk environment for ADIs.
Among the factors APRA considered in making its decision were:
- low credit growth;
- minimal change in the risk profile of new housing lending;
- movements in residential property prices, particularly recent growth; and
- increased entity costs due to operational risk events and misconduct.
After carefully examining
these dynamics, APRA concluded that the current policy setting remains
appropriate.
In conjunction with the other agencies on the Council of Financial Regulators,
APRA will continue to closely monitor financial and economic conditions. APRA
reviews the buffer quarterly, and may adjust it if future circumstances warrant
this.
However, the information paper notes that APRA is also giving consideration to
introducing a non-zero default level for the CCyB as part of its broader
reforms to the ADI capital framework.
APRA Chair Wayne Byres said: “Given current conditions, and the financial strength
built up within the banking sector, a zero counter-cyclical buffer remains
appropriate.
“However, setting the countercyclical capital buffer’s default position at a
non-zero level as part of the ‘unquestionably strong’ framework would not only
preserve the resilience of the banking sector, but also provide more
flexibility to adjust the buffer in response to material changes in financial
stability risks. This is something APRA will consult on as part of the next
stage of the capital reforms currently underway.
“Importantly, this would be considered within the capital targets previously
announced – it does not reflect any intention to further raise minimum capital
requirements.”
APRA expects to commence the next stage of its ADI capital consultation in the
first half of next year. APRA’s revised capital framework is currently
scheduled to come into effect from 1 January 2022.
The countercyclical capital buffer information paper is available on the APRA
website at: https://www.apra.gov.au/countercyclical-capital-buffer-0
