COVID-19: How APRA prepared for and has responded to the coronavirus crisis

To encourage enlistment in World War One, a 1915 recruitment poster  with an image of a father and his two children had the caption: “Daddy, what did YOU do in the Great War?” Once the fight against COVID-19 has been won, a similar question will almost certainly be asked of governments, businesses and regulators: “What did YOU do during COVID-19?”

The medical and economic fight against the global pandemic has been compared to a war effort, where all parts of the community must play their part to achieve victory. As Australia’s financial safety regulator, APRA’s primary responsibility in the battle against COVID-19 is to maintain the safety, stability and resilience of Australia’s banks, insurers and superannuation funds and the broader financial system.

To achieve this objective, APRA has publicly announced a number of actions in response to COVID-19 – such as adjusting bank capital expectations, delaying its 2020 supervision and policy priorities, changing reporting obligations for some of its regulated entities, and temporarily suspending the issuing of new licences. 

But what other action has APRA taken, both prior to, and during the coronavirus pandemic? And where does prudential regulation go from here?

APRA’s pre-COVID-19 work: pandemic preparation and bank capital

In the years leading up to the coronavirus, APRA – as a forward-looking regulator – invested significant effort to ensure that banks held high levels of capital and liquidity, and in pandemic planning, both of which proved invaluable as COVID-19 reached Australian shores.

As APRA Chair Wayne Byres noted in late March this year: “What is now becoming clear is that there has been considerable investment, over the years and behind the scenes, in preparing for the proverbial rainy day. That is proving very valuable now.”

1. APRA’s preparation for a possible pandemic

Pandemic preparedness, and the robustness of an individual institution’s pandemic response planning, has been an important topic for APRA since late 2005, following the outbreak of the H5N1 avian flu earlier that year.

In October 2006, APRA issued Prudential Practice Guide 233: Pandemic Planning and Risk Management. Later, this practice guide was reviewed and updated, and in May 2013, APRA issued Cross-industry Practice Guide (CPG) 233 – Pandemic Planning. CPG 233 is designed to assist APRA-regulated institutions to consider and carefully manage the risks posed by an influenza pandemic, or any other widespread outbreak of contagious disease that could affect their operations.

CPG 233 outlines key aspects of pandemic plans and how pandemic planning differs from traditional business continuity planning. But while the practice guide makes it clear that APRA expects all its regulated institutions to consider pandemic risks, APRA doesn’t mandate any particular operational approach. As long as regulated institutions meet APRA’s prudential requirements, they have the flexibility to configure their pandemic planning and risk management approaches in a manner best suited to meeting their business objectives.

2. Bank capital and liquidity

A key lesson from the 2008 global financial crisis (GFC) was the importance of resilience. Since the GFC, APRA has pursued an agenda of building financial sector resilience with substantial reforms to strengthen capital frameworks and liquidity requirements.

In addition, APRA implemented capital buffers for authorised deposit-taking institutions (ADIs) in 2013 to meet the internationally agreed Basel III standards – earlier than many jurisdictions around the world – and increased more recently to deliver on the Financial System Inquiry’s recommendation that ADIs be ‘unquestionably strong’ from a capital perspective. 

As a result, the banking system’s capital adequacy was at a historic high at the end of 2019. This financial system strength allowed the banks to benefit from their substantial capital buffers as COVID-19 took hold, without endangering the safety of the system.

In addition to capital, APRA implemented the Basel III standards for liquidity (the Liquidity Coverage Ratio or LCR) and stable funding (the Net Stable Funding Ratio or NSFR). These initiatives improved the quality of ADIs funding and increased their liquidity, allowing them to better withstand sudden shocks to the financial system. Despite the vast financial markets turmoil in March, ADIs funding remained sound across the system, and was given further support by the Reserve Bank of Australia’s new Term Funding Facility. 

APRA’s response to COVID-19

Australia’s first coronavirus case was confirmed on 25 January 2020. Soon after, in early February, APRA contacted financial institutions to ensure they had pandemic plans in place that met the requirements of CPG 233. These plans had to cover areas such as establishing a formal internal pandemic committee, identifying and protecting critical functions and considering alternative work arrangements.

All major financial institutions had plans in place, and many had already activated them. At the same time, APRA activated its own crisis management plans to protect its operations and staff health and safety.

Another of APRA’s early priorities was to gain an understanding of the immediate and potential future impacts of COVID-19 on APRA’s regulated entities. Initially, this took the form of asking entities to notify APRA of any material changes to their business activities resulting from the outbreak. Subsequently, APRA requested coronavirus impact statements from larger institutions across all APRA-regulated industries. 

The assessments, which varied depending on the institution, covered 10 different categories of risk, including funding, liquidity and financial measures, impact on staff, and effect on payments and settlements, as well as exposure to sectors of the economy considered to be relatively high-risk to fallout from the virus. In addition to informing APRA’s regulatory response, insights from this data were shared with Government, Treasury and APRA’s peer regulators.

As the coronavirus continued to spread, APRA readjusted its priorities to maintain its focus on the impact of COVID-19 on the financial system. Here, APRA benefitted from an organisational restructure in late 2019 that created separate supervision divisions along industry lines: banking, superannuation and insurance. APRA’s new divisions turned their attention to the coronavirus-specific issues arising in their respective industries. At the same time, APRA’s operational resilience team, which crosses the banking, superannuation and insurance industries, was watching and evaluating whether risks in one particular industry could evolve in another.

Banking industry response

In response to the crisis, APRA’s banking division has focused its supervision of regulated entities on three areas:

1. Operational resilience: including making sure that banks and other authorised deposit-taking institutions (ADIs) are able to maintain their banking and payment services at a time when large numbers of staff are working from home.
2. Liquidity risk: making sure banks and other ADIs are managing themselves and their balance sheets in the right way, given the volatility in financial markets.
3. Credit risk and capital profiles: monitoring stress tests and capital projections, and writing to ADIs in early April asking them to limit such distributions – including deferring or making prudent reductions in dividends – so they can use capital buffers to support lending activity.

Superannuation industry response

On 7 April, the Government announced its temporary early release of superannuation scheme, which allows fund members to withdraw up to $10,000 from their superannuation account this financial year and another $10,000 from 1 July. APRA responded immediately by looking at funds’ liquidity (i.e. making sure funds had enough cash to pay out expected withdrawals) as well as their operational capabilities (i.e. making sure the payments could be made accurately and in a short period of time). APRA risk-rated each of its regulated funds and has targeted its supervision of superannuation funds accordingly.

APRA has also been monitoring operational risk, as superannuation funds’ staff transitioned to working from home. APRA ramped up the regularity of phone calls with superannuation fund CEOs, requested a lot more data from entities, and collaborated closely with the Australian Tax Office, Australian Securities and Investments Commission, Treasury and the Reserve Bank of Australia.

Insurance industry response

In the general insurance industry, APRA has been paying close attention to certain business lines, particularly mortgage insurance, trade credit and landlord insurance. In the private health insurance industry, APRA has been engaging with insurers to understand the impact of the Government’s suspension of elective surgery, especially as the end of the financial year approaches. APRA supervisors have also increased the level and frequency of engagement with insurers across all business lines in relation to claims patterns and the value of their assets.

APRA’s April guidance on capital management was also sent to general insurers, life insurers and private health insurers, so that insurers maintain the capacity to underwrite insurance and pay claims given the highly uncertain outlook.

The road ahead

Right now, as APRA makes its prioritisation decisions, it is placing a very high weight on maintaining resilience within the financial system, and this will continue for some time. Some of APRA’s priority areas, such as COVID-19-related scenario and response planning, are likely to be more important for the foreseeable future. But APRA’s other longer-term goals and objectives are not being forgotten. Rather, they are simply getting a temporary lower weighting in APRA’s prioritisation. 

For those projects and work streams that are being deferred in the short term – such as investment in a new data collection tool, policy work on remuneration arrangements, and vulnerability assessments on climate change – APRA is continuing to plan and prepare so that it is ready to re-launch these activities when circumstances permit.

At the same time, COVID-19 has created new areas of work for APRA. In particular, COVID-19 has redefined the concept of operational resilience, especially the need for entities’ staff to be able to work from home for extended periods of time.

“Pandemic events, such as COVID-19, offer a rare but important opportunity to focus on people risk. The availability of key people is critical to an organisation’s ability to manage through such an event,” says Liz Parsons, APRA’s Head of Operational Risk. Going forward, APRA will continue to monitor entities’ operational resilience across all the industries it regulates, as entities adapt and take their learnings from COVID-19 into account.

In addition to this focus on operational resilience, APRA’s monitoring of superannuation fund liquidity, and the resulting changes to asset allocation, is work which will need much more attention over the next year than APRA had originally planned.

While some of APRA’s activities and projects have been delayed due to COVID-19, APRA has progressed further and achieved faster results in other areas, due to sharpened prioritisation: stress testing, resolution planning and cross-agency collaboration are examples. 

On the whole, the financial system has responded well thus far to the impact of COVID-19. There will no doubt be many learnings as risk management and contingency planning frameworks – within APRA as well as regulated entities – are put to the test. APRA is committed to ensuring those learnings are built into its future policy and supervisory activities to continue to improve the ongoing resilience of the Australian financial system.