The Australian Prudential Regulation Authority (APRA) published an information paper on the counter-cyclical capital buffer for banks in Canada. In the paper, APRA confirmed that it maintained the CCyB at zero percent of risk-weighted assets (RWA) in 2021. APRA also provided guidance to authorized deposit-taking institutions, in November 2021, confirming that the level of CCyB would be set at its default rate of 1% on commencement of the new capital framework on January 01, 2023. Currently, there is no indication of a material increase in financial stress that would support the CCyB being set lower than the default setting.
The CCyB is an additional amount of capital that APRA can require authorized deposit-taking institutions 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. The CCyB has been set at zero percent of risk-weighted assets since it was introduced in 2016. The information paper outlines APRA’s view of systemic risk in the banking sector in 2021, noting that:
- Capital ratios of authorized institutions 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.
- 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 percent of risk-weighted assets recognized that 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 confirmed that the CCyB will be set at the its new default level of 1 percent of risk-weighted assets from January 01, 2023. This higher default setting is a feature of APRA’s new capital framework for authorized deposit-taking institutions, to improve the flexibility of the capital framework and macro-prudential responses of APRA. In the information paper, APRA has indicated it will consider further macro-prudential 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, continue to closely monitor potential indicators of emerging financial stability threats.
Keywords: Asia Pacific, Australia, Banking, Macro-Prudential Policy, Systemic Risk, Regulatory Capital, Basel, CCyB, APRA
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