APRA: Capital buffer not needed amid property downturn

The banking regulator doesn’t see enough risk in the wilting housing market or banks’ capital positions to introduce a buffer.

The banking regulator doesn’t see enough risk in the wilting housing market or banks’ capital positions to introduce a “countercyclical capital buffer” early this year, although it will assess whether more contingency planning for a downturn is required.

The Australian Prudential Regulation Authority yesterday told the sector it would keep the amount of capital it requires ­deposit-taking institutions to hold to boost resilience during ­periods of “heightened systemic risk” unchanged at zero.

In contrast, the Bank of England in late 2017 raised its countercyclical capital buffer to 1 per cent, effective in November last year, from 0.5 per cent previously.

The APRA decision — which is reviewed quarterly — reflects confidence in the strength of the nation’s banks and their ability to withstand any economic downturn alongside the regulator’s other measures such as lending caps to curtail riskier forms of lending.

“APRA could have chosen to utilise the countercyclical capital buffer as a means of building ­resilience in the banking system. However, APRA took the view that the better course of action was to address, through targeted measures, the underlying concern: the erosion in lending ­standards driven by strong competitive pressures among housing lenders,” chairman Wayne Byres said.

“APRA’s assessment is that, collectively, its interventions achieved the necessary objective of strengthening lending standards and reducing a build-up of systemic risk in residential mortgage lending.

“The review provides some valuable insights on the impact of the measures, which have necessarily involved some trade-offs and judgment in the process of strengthening the resilience of the banking sector.

“While the temporary lending benchmarks are being removed, the changes we have made to lift lending standards are designed to be permanent, continuing to support the resilience of the banking system and ultimately the protection of bank deposits.”

APRA’s limits on bank lending to investors and on interest-only home loans have come to an end, after the caps caused a dramatic slowing in those parts of the market. The regulator monitors a range of indicators to make its decision on the buffer, including housing and business lending, household debt-to-income ratios, the proportion of riskier loans banks are writing, existing capital positions and banks’ non-­performing loans.

“The current financial stress core indicator is the share of ADIs’ (authorised deposit-taking institutions’) loans that are non-performing. This share remained low over the year to September 2018, at around 0.8 per cent,” APRA’s analysis said.

The report also cited moderate growth in housing and business lending last year, a drop in interest-only and investor loans and strengthening of bank capital ­positions as they sought to implement APRA’s “unquestionably strong” requirement that large banks have a common-­equity tier-one capital ratio of at least 10.5 per cent. Still, APRA will consider setting a countercyclical capital buffer at above zero as part of its broader ongoing review of banks’ capital.

“APRA will continue to closely monitor economic conditions, and will adjust the countercyclical capital buffer if future circumstances warrant it. APRA is also considering setting the buffer at a non-zero default rate.”

Across the Tasman, bank capital is also top of mind.

The Reserve Bank of New Zealand wants to markedly bolster bank capital positions, but has given the sector a slight reprieve, though an extension of a consultation period.

The RBNZ extended a deadline for feedback on the proposals from late March to May 3, and said it expected to publish final decisions in the third quarter.