APRA Proposes Expectations on Preparedness for Negative Interest Rates
The Australian Prudential Regulation Authority (APRA) granted Alex Bank Pty Ltd a license to operate as a restricted authorized deposit-taking institution and Alex Corporation Limited as a non-operating holding company. The Authority also published a letter seeking views, from the authorized deposit-taking institutions, on its expectations on their preparedness for the possibility of zero and negative interest rates. The requirement to maintain a framework to manage material risks is covered under the prudential standard CPS 220 on risk management. APRA will close the comment period for this consultation on August 20, 2021 and intends to finalize the expectations by October 31, 2021.
As defined in CPS 220, material risks are those that could have a material impact, both financial and non-financial, on the institution or on the interests of depositors. APRA considers the risks arising from an institution's lack of preparedness for zero and negative interest rates to be material, since this could have significant implications for risk management, hedging, operational processes, contracts, product disclosures, and IT and accounting systems, among other areas. Insufficient preparation for the possibility of zero and negative interest rates could, therefore, have an adverse impact on an authorized deposit-taking institution, its customers, and the markets in which it operates. Thus, APRA expects the institutions to take reasonable steps to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative. It expects the authorized deposit-taking institutions to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by April 30, 2022. Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems.
All products and activities are in scope for this expectation, except for lending products that do not reference the cash rate or a market rate including business lending, residential mortgages, personal loans, and credit cards. Solutions that generate an economic outcome that is the same as a negative interest rate are acceptable, subject to the appropriate risk management considerations. In developing tactical solutions, APRA expects the authorized deposit-taking institutions to consider all aspects of the products and activities that are in scope, including customer communications and disclosures. Additionally, the institutions should assess the associated operational risks and ensure that there are appropriate controls in place to manage them. Authorized institutions should also consider any relevant conduct related issues, including the potential for conflicts of interest, fair treatment of clients, and asymmetry of information. In developing these expectations, APRA has taken into consideration the responses received from authorized institutions to its December 2020 letter and international experience.
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Comment Due Date: August 20, 2021
Keywords: Asia Pacific Australia Banking CPS 220 Restricted ADI Interest Rate Risk Alex Bank Bank Licenses Credit Risk APRA
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