APRA flags setting countercyclical capital buffer at non-zero default level

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: Countercyclical capital buffer.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.

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