APRA releases annual report on counter-cyclical capital buffer
The Australian Prudential Regulation Authority (APRA) has published its annual information paper on the counter-cyclical capital buffer (CCyB), confirming that it maintained the CCyB at zero per cent of risk-weighted assets (RWA) in 2021.
The CCyB is an additional amount of capital that APRA can require authorised deposit-taking institutions (ADIs) to hold or release at certain points in the economic and financial cycle. It is one of the tools in APRA’s macroprudential policy framework to reinforce bank resilience, which can be relaxed during stress to provide banks with additional flexibility to maintain their lending. It has been set at zero per cent of RWA since it was introduced in 2016.
Today’s paper outlines APRA’s view of systemic risk in the banking sector in 2021, noting that:
- ADI capital ratios are at historically high levels and are unquestionably strong;
- There is ongoing uncertainty due to COVID-19 and some downside risks remain. In addition, lockdowns have affected large parts of the country during the year, however levels of financial stress remain low; and.
- APRA and the Council of Financial Regulators (CFR) became increasingly concerned in 2021 with financial stability risks associated with increasing shares of new mortgage lending at high levels of debt-to-income, alongside rapid increases in housing prices and rising credit growth.
The decision to maintain the CCyB at zero per cent of RWA recognised the CCyB is a broad-based macroprudential tool. In responding to specific risks in the housing sector, APRA has preferred to take more targeted macroprudential action by increasing the minimum interest rate buffer banks use when assessing home loan applications.
APRA also confirmed that the CCyB will be set at the its new default level of 1 per cent of RWA from 1 January 2023. This higher default setting is a feature of APRA’s new ADI capital framework, to improve the flexibility of APRA’s capital framework and macroprudential responses.
In the information paper, APRA has indicated it will consider further macroprudential measures if risks to financial stability continue to build. If risks become broad-based, this could include raising the CCyB above its default setting.
Chair Wayne Byres said APRA and other members of the CFR, are continuing to closely monitor potential indicators of emerging financial stability threats.
“Over the past year, APRA became increasingly concerned with financial stability risks associated with high levels of debt in the housing sector alongside rapid increases in housing prices.
“While the CCyB is an important macroprudential tool, we judged it wasn’t the most appropriate option for the current circumstances and more targeted measures were better able to mitigate risks to financial stability emanating from the housing sector,” Mr Byres said.
Copies of the today’s information paper are available on APRA’s website at: Countercyclical capital buffer - December 2021.
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.