IMF published staff report and selected issues report under the 2019 Article IV consultation with Australia. The IMF Directors agreed that the current macro-prudential policy stance remains appropriate and encouraged the authorities to continue improving the readiness of their macro-prudential toolkit. The Directors highlighted that Australian banks remain adequately capitalized and profitable. They supported the plans of authorities to further enhance the loss-absorbing capacity of banks. The Directors emphasized that reform priorities should include implementing the recommendations of APRA Capability Review and reinforcing the financial crisis management arrangements, as highlighted in the 2018 Financial Sector Assessment Program (FSAP).
The staff report highlights that Australian banks are adequately capitalized and profitable. However, the banks are vulnerable to high household debt, exposed to residential mortgage lending, and dependent on wholesale funding. Major banks’ common equity tier 1 capital ratio averaged 11% in September 2019, above the 10.5% "unquestionably strong" threshold required by January 01, 2020. The capital framework for banks has been further strengthened. APRA announced, in July 2019, the requirement for domestic systemically-important banks to strengthen their total loss-absorbing capacity by lifting their total capital by 3 percentage points of risk-weighted assets by January 01, 2024. With this, the four major banks in the country will be expected to maintain a total capital ratio of nearly 17.5%. APRA has also proposed revisions to the capital framework for banks to ensure that the capital held against assets is more sensitive to their riskiness and aims to reduce the concentration of residential mortgages on bank balance sheets. Also indicated is the likelihood of setting a countercyclical capital buffer at non-zero default level.
Macro-prudential policy, working in tandem with stricter enforcement of prudential regulations, has been effective in reducing riskier mortgage loans. The tightening of macro-prudential policies over 2014-17 helped address high-risk mortgage lending. The assessment suggests that APRA should continue to expand and improve the readiness of the macro-prudential toolkit to allow for more flexible and targeted responses to persistent and new systemic risks. Staff concurs with the recommendation of the APRA Capability Review to further strengthen transparency and public communication on macro-prudential policy. Continued implementation of the recommendations of the 2018 FSAP should remain a priority. Banking and insurance supervision is being strengthened through new enforcement, governance, and risk management approaches for APRA and by the adoption of a supervisory model incorporating stress testing. Strengthening systemic risk oversight of the financial sector and reinforcing financial crisis management arrangements should remain priorities. The authorities should complete the resolution policy framework, expedite the development of bank-specific resolution plans, and introduce statutory powers for bail-in.
Furthermore, important challenges remain in energy and climate change policies. Uncertainty around the climate change mitigation policies in Australia may impact investment decisions and sustainable growth. Developing and implementing an ambitious, national, integrated approach to climate change policy, including long-term goals and strategies, and clarifying how existing and new instruments can be employed to meet the Paris Agreement goals, would help reduce policy uncertainty and catalyze environmentally friendly investment in the energy sector and the broader economy.
Keywords: Asia Pacific, Australia, Banking, Insurance, Article IV, FSAP, TLAC, Macro-Prudential Policy, NPLs, CCyB, Climate Change Risk, ESG, Governance, Systemic Risk, Resolution Plan, APRA, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).
The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).
The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.
EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.
The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.