Byres flags prudential priorities amid COVID-19 fight

  • By Christine St Anne

Banks can expect capital management to come under scrutiny, as financial and operational resilience –the core of prudential supervision–will be the primary area of focus in the foreseeable future.

APRA chair Wayne Byres highlighted the regulator’s priorities in a speech to the International Banking Federation on Wednesday evening; Byres spoke about APRA’s  “approach to the COVID-19 fight”.

One of the topics he explored was how the virus might change regulatory and supervisory priorities into the future and even seem to draw some inspiration from a Rocky movie  - “as experienced boxer knows, resilience in the ring requires more than just being unquestionably strong”.  

For Byres, “supervisory resources will inevitably need to be directed to the greatest risks” – that is operational risk.

Other areas of interest such as governance, culture and executive pay won’t go by the wayside and that APRA will still ensure it supervises effectively those areas.

Byres said operational resilience is key because “the threats are substantial”.

“Capital management will come under intense scrutiny as banks’ organic capital generation comes  under  even  more  pressure,” Byres said.

APRA has already flagged that banks should hit the pause on dividend payments and as highlighted in the recent first-half results, the banks have responded accordingly.

“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 also flagged that post-2008 reforms will be tested and there could be areas for improvement.

One area, that there could be scope for “reshaping” is in the area of buffers.

“One area where I think we are learning a lot at present is the ability to use buffers. It is not as easy as hoped, despite them having been explicitly created for use during a crisis,” Byres said.

Here he spoke about re-setting expectations.

“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’,” he said.

“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.  

“So expectations seem to have shifted and created a new de fact minimum. We need to think about how to reset that expectation,” he said.

He also added that APRA allowed banks to build up capital to meet their ‘unquestionably strong’ benchmarks in an orderly way over a number of years.

“We should not be complacent about the rebuild, but there are also risks from rushing it.”

Transparency will also become crucial.

“In times of uncertainty, timely, reliable and  accurate information is especially highly valued. 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.”

Byres indicated that the regulator will be willing to be flexible in adjusting to challenges as the outlook changed.

“Strength going into battle is obviously important, and we are fortunate that the Australian banking system had that.

“But as any experienced boxer knows, resilience in the ring requires more than just being unquestionably strong.”

For Byres, “a good fighter needs balance and flexibility, physically and tactically, to avoid or absorb punches and adjust their strategy as circumstances change”.

“We all have to be quick on our feet,” he said.

“Risks continue to evolve and we have to continually respond and adapt accordingly.

“For our part, we have sought to move quickly, provide flexibility and maintain a balance; this has required having an eye to the immediate threats while also bearing in mind the need to conserve strength for the longer-term.

“We have to make sure we can all go the distance.”