The prudential regulator has called on banks to deploy some of their large equity capital buffers towards new lending to support borrowers struggling through the COVID-19 crisis, joining the Reserve Bank and Treasury in unprecedented emergency regulatory action aimed at fending off economic shocks.
The action from the Australian Prudential Regulation Authority rounded out an historic, lock-step campaign from financial regulators, banks and the federal government to do whatever it takes to support Australian business through the pandemic.
Despite the measures, the major banks all closed sharply lower on the ASX on Thursday. CBA fared best of the majors, losing almost 5 per cent, while Westpac and NAB were down almost 9 per cent and ANZ almost 10 per cent.
Reserve Bank governor Philip Lowe said banks “have an important role to play in building the bridge to the recovery, by supporting their customers. Without this support, it will be harder for us all to get to the other side in reasonable shape.”
Commonwealth Bank chief executive Matt Comyn threw his support behind the initiative and immediately slashed interest rates on small business loans by 100 basis points while cutting one-, two- and three-year fixed rate home loans by 70 basis points.
“Unfortunately, over the next six to 12 months, there’s going to be some substantial disruption to our lives. And that’s why we need to be able to operate and support the country,” Mr Comyn said.
The APRA said banks will get temporary relief from its “unquestionably strong” capital requirement, allowing them to lend billions of extra dollars to small businesses struggling as the coronavirus smashes cash flows. It said the decision was necessary in order to allow banks to take advantage of new $90 billion in funding facilities announced by the Reserve Bank on Thursday.
APRA’s move will also reduce the need for banks to rush to the equity markets to raise capital in the short term if loan losses mount.
“APRA’s objective in building up this capital strength has been to ensure it is available to be drawn upon if needed in times such as this,” said APRA chairman Wayne Byres.
Dr Lowe said Australia “has a strong financial system, which is well placed to provide the needed support to businesses and households. The system has strong capital and liquidity positions and the financial system has invested in the resilience.”
The Council of Financial Regulators will meet again on Friday and is also considering delays to other regulatory demands — including timetables for implementation of the Hayne royal commission’s recommendations — to allow banks to concentrate on helping their customers. The CFR will meet with the big banks to see if “there are further regulatory initiatives that could be taken,” Dr Lowe said.
Pradeep Philip, partner at Deloitte Access Economics, said the banks and regulators were “genuinely trying to think about unconventional measures for unconventional times and can do that because we have a strong and stable financial sector — notwithstanding Hayne.”
Since the financial system inquiry chaired by David Murray, the banks have built up big equity buffers to help them withstand a financial crisis, like the one that has emerged in recent weeks.
Banks have $235 billion of common equity tier 1 (CET1) capital, well above minimum regulatory requirements. The actual CET1 ratio of the banking system at the end of 2019 was 11.3 per cent, much higher than the 10.5 per cent benchmark for the “unquestionably strong” major banks.
Banking industry sources said dropping the CET1 capital ratio from 11.3 per cent to 10.3 per cent would free up more than $250 billion of lending for businesses from major banks.
“APRA has been pursuing a program to build up the financial strength of the system for many years, when banks had the capacity to do so. As a result, the Australian banking system is well-capitalised by both historical and international standards,” Mr Byres said.
“Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19,” APRA said.
The announcement, made a half an hour after the Reserve Bank, “reflects the underlying strength of the system”, Mr Byres said.
“Even if the banking system utilises some of its current large buffers, it will still be operating comfortably above minimum regulatory requirements.”
APRA’s leniency will allow banks to absorb some problem loans without having to rush to equity capital markets in order to to preserve the CET1 ratio while raising equity at diluted prices.
Analysts say APRA capital relief is a positive for banks given balance sheets are exposed to the current volatility. Macquarie analyst Victor German said before the APRA decision that new accounting methodology would see banks recognise coronavirus-induced losses earlier, impacting on capital ratios as credit quality deteriorates.
“This will have an impact on banks’ ability to meet unquestionably strong capital requirements and may require significant dividend cuts and capital raisings,” he said in a note ahead of APRA’s decision. But “if the regulator provides near-term capital relief, it may reduce the need to raise capital in the near term.”
Dr Lowe said in a briefing after the market closed on Thursday that he is worried about the potential for a spike in unemployment to trigger defaults from heavily indebted households. He said additional customer protections are being considered by the banks, which would be in a more difficult position later if leniency was not provided to customers now.
“The vulnerability for households comes if they lose their jobs, which is why we focus on doing what we can for businesses to keep employing people and keeping staff on,” Dr Lowe said. “If someone with a higher level of debt loses their job, they are going to have difficulty. We are working with banks, so banks can help people through this period of temporary unemployment.”
“If [banks] don’t support people, the unemployment rate will be higher, there will be more stresses, the economy will be weaker, and the banks’ credit losses will be larger,” Dr Lowe said.
APRA’s move came a day after the Reserve Bank of New Zealand said it would defer the start date of its increased capital requirements for the Australian banks, which operate in that market, by 12 months. It expects this will enable banks to provide an additional $47 billion of credit to the NZ economy.
APRA’s statement came after Treasurer Josh Frydenberg said, in coordinated regulatory action on Thursday afternoon, that the Australian Office of Financial Management (AOFM) would invest $15 billion in wholesale funding markets used by smaller banks and non banks. Its buying would not be limited to residential mortgage backed securities and could include other assets.
The RBA also announced a $90 billion term funding facility for banks to support lower-cost lending to small and medium enterprises and encouraged banks to take advantage of the scheme “to support their customers and help the economy through a difficult period”.
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Ratings agencies said the unprecedented coordinated regulatory actions were a positive for bank credit profiles. They would enable banks to “access stable funding and liquidity and promote credit availability to the economy,” Moody’s Investors Service said.
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James Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at email@example.com
James Frost writes about banking, funds management and superannuation. Based in Melbourne, James has been reporting on specialist business and finance topics for 15 years. Connect with James on Twitter. Email James at firstname.lastname@example.org