Banks urged to dip into capital buffers to fuel lending

The Council of Financial Regulators (CFR) – which includes the Reserve Bank of Australia (RBA), Treasury, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) – has published its latest quarterly statement, which focused on the ongoing response to the COVID-19 crisis.  

The CFR was cautiously optimistic about the economic outlook, acknowledging that while the crisis induced the “biggest economic contraction since the 1930s”, signs of a steady recovery have emerged.

“[The] rate of new infections has declined sharply in Australia and restrictions have been eased in many parts of the country earlier than was previously thought likely,” the CFR noted.

“As a result, economic activity is now beginning to recover in some sectors.

“Conditions in financial markets internationally and in Australia have improved after a period of significant disruption in the early stages of the pandemic.”

The CFR lauded the “coordinated” economic response from governments, regulators and the private sector, which, it said, “is working and will help to support the recovery ahead”.

However, the regulators stressed that the outlook remains uncertain, adding that the pandemic would likely have “long-lasting effects” both locally and globally.

The financial sector has therefore been urged to continue to support the recovery effort to “cushion the effects” of shutdown measures on households and businesses, with the CFR noting the importance of a cautious transition from financial relief measures, including loan repayment deferral period, set to expire in September.

“Members agreed that financial institutions, regulators and governments will need to continue to show flexibility in order to support the objectives of economic recovery, resilience of financial institutions, and fair household and business outcomes,” the CFR added.

As part of the financial sector’s contribution to the recovery, the regulators have called on lenders to dip into their capital reserves to help facilitate the “continued flow of credit” to the economy.   

“APRA has reiterated that the large capital buffers above regulatory minimums that were built up in more favourable times ought to be used during this extreme shock,” the CFR stated.

“Members encourage institutions to make use of their capital buffers to continue to support businesses and households.”

In March, APRA made temporary changes to its expectations regarding bank capital ratios to “ensure banks are well positioned to continue to provide credit to the economy”.

APRA noted that with banks maintaining capital levels “well above minimum regulatory requirements”, it would be appropriate to enable them to use the “large buffers” they’ve established to facilitate ongoing lending to the economy.

As a result, provided that banks meet their minimum capital requirements, 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.

Banks have also received liquidity support from the RBA, which has purchased approximately $54 billion in government bonds from banks, ramped up repurchase transactions (repo) via the overnight market operations, and made $90 billion in low-cost business funding available via its term funding facility (TFF).

As at 17 June, only $11.5 billion had been drawn down from the TFF by Australia’s banks.

This leaves approximately $72.5 billion in funds available for the banks to draw down over the coming months, with the TFF expiring on 30 September.

[Related: Bank drawdowns on $90-billion TFF dry up]