APRA seeks to optimise three frameworks to improve banking resilience

Chair reveals all at the 2021 UBS Australasia Conference

APRA seeks to optimise three frameworks to improve banking resilience

Australian Prudential Regulation Authority (APRA) chair Wayne Byres has revealed APRA’s detailed plans to build financial resilience in the banking sector in a speech at the 2021 UBS Australasia Conference.

Citing three papers to be published before the year-end, Byres named three frameworks – namely bank capital, macroprudential and resolution – as foundations for safety and stability in the banking industry.

“The architecture I have laid out is not new. The component parts have been part of APRA’s armoury for many years,” Byres said. “But what we have been doing over the past couple of years is making sure the individual components are optimised to work together and reinforce one another.”

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The bank capital framework is, above all else, “risk sensitive.” It will respond to differences in each bank’s portfolio composition and the fluctuation of economic activity but will be firm in raising minimum capital requirements and provide regulatory buffers that can be utilised in times of stress.

“But by and large, the capital framework can be thought of as a constant through the cycle, calibrated to achieve a high level of safety and stability so that banks can absorb losses and continue to provide critical functions through good times and bad,” Byres said.

Meanwhile, the macroprudential framework serves as a complement to the bank capital framework as well as traditional microprudential requirements.

Since macroprudential policy measures are often counter-cyclical in nature, using this framework “judiciously and sparingly” can fend off risks that threaten financial stability. The APRA is currently looking into different macroprudential tools to employ, such as capital-related tools and credit-related tools.

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However, the use of both frameworks can only reduce risk, not eliminate it. As such, Byres turned to the resolution framework as APRA’s pre-positioned back-up plan in cases when the bank capital and macroprudential framework fail.

This broader framework was adopted in 2019 when APRA ordered the four major banks to maintain additional loss absorbing capacity (LAC) to support their orderly resolution.

“Each paper is significant in its own right,” Byres said. “But it is important to see the three frameworks as part of an overarching and reinforcing architecture designed to fortify the financial soundness of the Australian banking system throughout the economic cycle.”

Byres’ full speech can be found here.