The Reserve Bank is confident that banks’ capital positions will hold up if COVID continues to disrupt the Australian economy and conditions deteriorate “substantially”.

The RBA has provided an update on its bank stress testing in the latest Financial Stability Review, saying there is no threat to minimum capital requirements under its downside scenario.

The bank’s downside scenario includes GDP falling by a little over 10 per cent, the unemployment rate rising to over 10 per cent and house prices falling by around 10 per cent.

“The resulting capital depletion for large and mid-sized banks is around 3 percentage points,” the RBA said

“In such a scenario, even after the recently announced capital returns by the major banks, common equity tier 1 capital ratios would remain substantially above prudential minimum requirements.”

Stress testing done by APRA last year also indicated that the banking system would withstand a “severe downturn” and remain above its minimum capital requirement.

The RBA also said banks’ holdings of high-quality liquid assets have increased since the start of the pandemic.

As banks’ holdings of HQLA have increased, allocations under the RBA’s Committed Liquidity Facility have declined, particularly for the four major banks. Since the start of the pandemic, the CLF has fallen by $83 billion to $140 billion.

In September, APRA told ADIs that they must cut their use of the CLF to zero by the end of next year. It said that with the significant increase in government and semi-government bond issuance in the past year, there are sufficient high quality liquid assets for ADIs to meet their liquidity requirements without the need for the CLF.

Banks’ required holdings of liquid assets, which are there to cover deposit outflows in a stressed scenario, have increased since the start of the pandemic because of big increases in deposits.