Crisis to ‘precipitate enduring change’: APRA

In an address to the board of the International Banking Federation, chair of the Australian Prudential Regulation Authority (APRA) Wayne Byres has stressed that promoting financial stability would be the regulator’s primary objective in the years ahead as the financial sector grapples with the long-term impact of the COVID-19 crisis.

Mr Byres said the global operating environment “will not simply pick up where it left off” once health risks associated with the pandemic abate.

“While I cannot predict its precise form, this crisis will almost certainly precipitate enduring change in the way society operates,” he said.

“The idea that we’ll employ some temporary measures and then everything will ‘go back to normal’ is therefore a dangerously naive one on which to base our decisions.

“Flexibility and agility will be important – we have a long battle ahead.”

Mr Byres added that, as a result, “financial and operational resilience” would be the “primary area” of APRA’s focus in the “foreseeable future”. 

“That is not to say supervisory focus on other areas of interest – such as governance, culture and remuneration – will go by the wayside. They are still important, and we will still pursue them,” he said.

“But supervisory resources inevitably need to be directed to the areas of greatest risk. For the next little while, ensuring financial and operational resilience will be the priority, because the threats are substantial.

According to the APRA chair, capital management would likely come under “intense scrutiny” as banks’ organic capital generation mechanism “come under even more pressure”.

“Until there are clear signs of an economic recovery and banks are able to generate capital from retained earnings, it is reasonable to expect supervisory scrutiny of capital management and stress testing results to remain very high,” he said.

Reviewing post-GFC reforms

Mr Byres also noted that the regulator may also need to consider changes to reforms implemented in response to the global financial crisis.  

“The post-2008 reforms will be properly tested, and inevitably we will find areas where they can be improved,” he said.

“Before anyone misinterprets that comment, I am not advocating a watering down of the post-2008 reforms. It may in fact turn out they’re insufficient, and we need to do more.

“Maybe they just need to be reshaped a bit. I do not know. But inevitably there will be things we learn, and we should not allow a determination not to backtrack on reforms to deter us from improving them.”

Mr Byres made specific reference to the use of capital buffers, which he conceded “is not as easy as hoped”.

“One blockage does seem to be that markets, investors and rating agencies have all adjusted to contemporary capital adequacy ratios as, as the name implies, ‘adequate capital’. But in many jurisdictions, like Australia, ratios are at historical highs.

“We often hear concern about our major banks’ CET1 ratios falling below 10 per cent. This is even though, until a few years ago, their CET1 ratios had never been above 10 per cent and yet they were regarded as strong banks with AA ratings.”

He added: “So, expectations seem to have shifted and created a new de facto minimum. We need to think about how to reset that expectation.”

Transparency

The APRA chair stressed the importance of information transparency in preserving financial stability.  

“Markets depend on information. In times of uncertainty, timely, reliable and accurate information is especially highly valued,” he said.

“Moreover, we have learned from previous crises that if markets lose faith in any of those characteristics, they will tend to run first and ask questions later.

“We cannot afford that to happen. It is very important that we continue to promote transparency and not be tempted to panic and switch the lights off in the mistaken view that it’d be better for everyone to operate in the dark.”

Mr Byres concluded by noting that transparency enables stakeholders to accurately assess risks, adding that in the absence of regulatory prompting, banks “should err on the side of revealing more rather than less”.

[Related: APRA lauds ‘virtue’ of bank regulation]