The Australian Prudential Regulation Authority (APRA) published a letter outlining its final expectations regarding the preparedness of the authorized deposit-taking institutions for the possibility of zero and negative market interest rates and cash rate. Following the feedback received on the draft expectations released for consultation in July 2021, APRA decided to exclude customer accounts with an aggregate deposit balance of less than AUD 10 million from the scope of its expectations. APRA also extended the timeframe for the development of tactical solutions to July 31, 2022.
Consistent with APRA’s draft expectations, APRA expects authorized deposit-taking institutions to, at a minimum, develop tactical solutions. Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems. Solutions that generate an economic outcome that is equivalent to a negative interest rate are acceptable, subject to the appropriate risk management considerations. to implement zero and negative market interest rates and cash rate. In addressing the other comments, APRA notes the following:
- APRA recognizes that authorized deposit-taking institutions may make a commercial decision not to implement zero and negative interest rates on certain products that are in scope for APRA’s expectations. However, APRA expects authorized deposit-taking institutions to prepare for zero and negative rates on all products and activities that are in scope, given APRA’s objective is to facilitate consistency in preparedness across the industry.
- Interest rate floors in lending products that reference the cash rate or a market rate are an acceptable solution. However, given the higher likelihood of negative interest rates on deposits of AUD10 million or more, APRA expects authorized deposit-taking institutions’ preparations to extend beyond the use of zero interest rate floors on such deposits.
- In developing tactical solutions, APRA expects authorized deposit-taking institutions to pre-position themselves by July 31, 2022 in all relevant aspects of the products and activities that are in scope, including customer communications and disclosures. As a result of a deposit product no longer qualifying as a ‘basic deposit product’, additional requirements administered by ASIC may apply under the Corporations Act 2001. An authorized deposit-taking institution affected by this should pre-position itself to ensure compliance with the additional requirements.
- Following the development of tactical solutions by July 31, 2022, APRA expects authorized deposit-taking institutions to be able to implement the solutions within three months, if required.
The scope of the draft expectations extended to all products and activities—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. Earlier, the Reserve Bank of Australia has stated that a negative cash rate is highly unlikely in Australia. This, however, does not preclude the possibility of a negative cash rate in the future or of other interest rates determined in the financial markets falling to, or below, zero. CPS 220, the prudential standard on risk management, requires an authorized deposit-taking institution to maintain a risk management framework to manage material risks. 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 the operations of an authorized deposit-taking institution.
Keywords: Asia Pacific, Australia, Banking, Negative Interest Rates, CPS 220, Interest Rate Risk, ASIC, APRA
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