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APRA chair Wayne Byres addressed the regulator’s recent release of an information setting out its macroprudential policy tools, in an address to the UBS Australasia Conference on Monday (15 November).
More information papers focused on stability in the banking system are set to follow, with one on the capital framework due before the end of November and another on resolution planning and loss-absorbing capacity by the end of the year.
APRA is raising its minimum capital requirements, consistent with the benchmarks it set in 2017, with the banks already holding more than enough capital to meet the standards.
The greater capital buffer will involve a larger share designated specifically for regulatory buffers, which can be used for stress.
This will include the Countercyclical Capital Buffer CCyB, which was introduced into the internationally agreed Basel framework in 2011, but has not yet been implemented in Australia.
APRA has proposed using a default setting of 1 per cent for the CCyB, which could be adjusted over time in response to conditions.
“According to the Basel standards, it is to be deployed ‘when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk, to ensure the banking system has a buffer of capital to protect it against future potential losses,’” Mr Byres explained.
“APRA has not deployed the CCyB in Australia to date, largely because it risked complicating the build-up of capital that was occurring in response to the ‘unquestionably strong’ benchmarks. However, as we settle into the new system, we see benefit in having a requirement that can be dialled up, and down, in response to the peaks and troughs of the economic cycle.”
However, Mr Byres noted the regulator may not choose to use capital-related measures at all.
“Given what we have experienced in Australia in recent years, targeted credit-related measures have tended to be the tool of choice,” Mr Byres said.
“Each of our various interventions in relation to mortgage lending – benchmarks on the growth in investor lending introduced in 2015, limits on the share of interest-only lending implemented in 2017 and, most recently, an increase in the serviceability buffer initiated from the end of last month – have been targeted at specific vulnerabilities that were evident at a particular point in time.
“Having a wide range of options at our disposal is helpful for ensuring we can address emerging risks in a targeted manner, limiting spillover effects and unintended consequences.”
Mr Byres also noted that the macroprudential framework has not introduced significant new approaches, rather has sought to provide more transparency around APRA’s potential lending curbs.
Further, the last framework, on resolution planning, will include APRA finalising its approach to additional loss-absorbing capacity.
[Related: APRA runs through lending control toolkit]