APRA sets expectations for negative rates

While noting that the Reserve Bank of Australia has stated that a negative cash rate is highly unlikely in Australia (and amid mounting speculation that the RBA may move rates up [rather than down] sooner, rather than later), the prudential regulator has said that this “does not preclude the possibility of a negative cash rate in the future or of other interest rates determined in the financial markets falling to, or below, zero”.

As such, in July, the Australian Prudential Regulation Authority (APRA) released for consultation draft expectations regarding its expectations for bank preparedness for zero and negative interest rates. 

At the time, it outlined that it expected banks to – at a minimum – develop “tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022”. These are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems, according to APRA.

It also outlined that these would be extended to all products and activities, except for lending products that do not reference the cash rate or a market rate. As such, residential mortgages, personal loans, business loans and credit cards would remain outside the scope.

After receiving 14 submissions (12 from banks and two from industry bodies), APRA has now written to authorised deposit-taking institutions (ADIs) to outline its final expectations.

In the letter, the regulator acknowledged that some banks may make a commercial decision not to implement zero and negative interest rates on certain products within the scope, but added that it still expects them to prepare to do so.

Notably, the final expectations contain two changes:

• Extending the time frame for development of tactical solutions to 31 July 2022, “recognising the low likelihood of widespread negative interest rates in the near term
• Excluding customer accounts (including those of related parties) with an aggregate deposit balance of less than $10 million. According to APRA, industry feedback suggested that “tactical solutions would increase operational risk due to the large number of customers involved”

APRA also told ADIs that it believed interest rate floors in lending products that reference the cash rate or a market rate were an acceptable solution; it added that given the higher likelihood of negative interest rates on deposits of $10 million or more, it expects ADIs’ preparations to “extend beyond the use of zero interest rate floors on such deposits”. 

Banks will be expected to implement their prepared “tactical solutions” within three months, if required. 

[Related: Inflation movements spark cash rate speculation]