APRA holds countercyclical capital buffer at zero per cent

The Australian Prudential Regulation Authority (APRA) has today released its latest assessment of the appropriate setting for the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs).

The CCyB is an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk. It has been set at zero per cent of risk-weighted assets since it was introduced in 2016.

In its annual information paper on the CCyB, APRA today confirmed it considers that a zero per cent CCyB remains appropriate at this point in time based on an assessment of the systemic risk environment for ADIs.

Among the factors APRA considered in making its decision were:

• the very large economic downturn due to COVID-19;
  
   
• the need for ADIs to use their capital buffers to support the economy; and 
  
   
• the risk of further stresses to come, through factors including new outbreaks of COVID-19 and the gradual withdrawal of financial assistance measures.

After carefully examining these dynamics, APRA concluded that the current policy setting remains appropriate, and will likely remain so until at least the end of 2021.

APRA Chair Wayne Byres said: “The counter-cyclical capital buffer is designed to ensure banks build up additional capital in the face of increasing systemic risk, which they can then use to absorb losses and support the economy in times of stress. The Australian banking system is holding historically high capital buffers above regulatory requirements, which were built up pre-COVID. APRA has made clear that these buffers are available to be used to continue to support lending activity, and the broader economic recovery.”

“In the current environment, keeping the CCyB at zero per cent is clearly the appropriate course of action. Furthermore, although we will obviously continue to monitor economic and financial conditions closely, we think that is likely to remain the best course of action until at least the end of 2021,” Mr Byres said.

In conjunction with the other agencies on the Council of Financial Regulators, APRA will continue to closely monitor financial and economic conditions. APRA reviews the buffer regularly, and may adjust it if future circumstances warrant this.

Separately, APRA has previously flagged its intention to introduce a non-zero default level for the CCyB, and outlined a proposal to do so as part of its consultation on making the ADI capital framework more risk-sensitive, flexible and transparent. This set of reforms will not come into effect until the beginning of 2023.

The countercyclical capital buffer information paper is available on the APRA website at: Countercyclical capital buffer.