In a recent speech, the chair of the Australian Prudential Regulation Authority (APRA) said APRA’s COVID-19 response assumed a scenario which involved elevated unemployment and sharp falls in property prices: this includes a slow recovery in GDP growth over the three-year horizon, unemployment of around 10 percent in mid-2021, and falls in housing and commercial property prices of around 30 percent.

Capital management
He observed that:

“Our banks and insurers remain soundly capitalised and highly liquid. APRA’s stress testing of the banking sector indicates the industry is well-placed to withstand any major economic headwinds ahead: even when faced with severely adverse scenarios, our analysis indicates the banking industry would remain well above minimum capital requirements. The insurance sector remains willing and able to support customers in times of need. Both sectors have also proven operationally resilient in the face of severe disruption to many aspects of their business activities. And the superannuation sector has demonstrated the financial and operational resilience to respond rapidly to the temporary early release scheme, taking just over three business days on average to process 3.6 million applications to a value of $25.3 billion and counting. It has done so while also supporting the extensive capital raising by the corporate sector over the past few months: a critical role that should not be underestimated.”

He said APRA will be updating its capital management guidance to extend it for the remainder of 2020, shifting from the immediate, short-term emergency response in April to a setting with a somewhat longer-term outlook.

“I want to be clear we have no intention of creating a capital cliff-face that banks or insurers need to rapidly climb. As we have done in the past, our approach will be to allow banks and insurers to rebuild (to the extent any rebuild is even required) in an orderly manner, and in a way that doesn’t unnecessarily constrain activity or economic growth.”

Loan deferrals
He made the following observations with respect to deferrals:

“Based on preliminary data for end June, about 10 per cent of loans by the banking system – worth $269 billion – have had repayments deferred.This is a substantial stock, and in thinking about how to avoid the September cliff we had to consider how best to facilitate an orderly transition out of the deferral program. Ceasing all deferrals in October would not be helpful. Equally, just rolling over deferrals without any exit strategy is unlikely to be in borrowers’ or banks’ interests.

By extending the concessionary approach until the end of March next year, we sought to remove regulatory disincentives to banks offering additional support beyond the end of September. At the same time, we have made clear that banks should only offer further repayment deferrals in cases where they have some degree of confidence the borrower could return their loan to performing status. We also granted a window of time and an incentive, via another concessionary capital treatment available for a limited period, for banks to restructure borrowers’ debts with a view to putting them on a sustainable financial footing. This second concession is designed to encourage banks to work with their customers now, rather than simply defer again and hope for the best. And finally, to maintain transparency, we will require additional, regular disclosure of banks’ deferred and restructured loan portfolios – there is no hiding the issue.”

Banking COVID-19 frequently asked questions
APRA’s FAQs cover:

• Loan repayment deferrals
• Residential mortgage lending
• Credit risk capital requirements
• Market risk capital requirements
• Credit risk capital requirements
• Securitisation requirements.

If you found this article helpful, then subscribe to our news emails to keep up to date and look at our video courses for in-depth training. Use the search box at the top right of this page or the categories list on the right hand side of this page to check for other articles on the same or related matters.

Author: David Jacobson
Principal, Bright Corporate Law
Email:
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.