The Council of Financial Regulators has endorsed APRA’s position that banks should use their capital buffers to ensure the continued flow of credit.
The CFR released a statement following its quarterly meeting, saying: “APRA has reiterated that the large capital buffers above regulatory minimums that were built up in more favourable times ought to be used during this extreme shock.
“Members encourage institutions to make use of the capital buffers to continue to support businesses and households.”
In March, APRA gave banks approval to use their capital buffers to support credit flow. APRA said this would apply especially for banks using the Reserve Bank’s term funding facility.
APRA said that over the past decade banks have built up substantial capital buffers, “typically maintaining capital levels well above minimum regulatory requirements.”
In 2017, it set benchmark capital targets to enable them to be regarded as unquestionably strong. For the four major banks this benchmark requires them to have a common equity tier 1 ratio of at least 10.5 per cent of risk weighted assets (less for smaller banks).
At the end of last year the CET1 ratio of the banking system was 11.3 per cent.
APRA said: “Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19.”
To date the big banks have not dipped into their buffers. At ANZ’s half-year results briefing, chief executive Shayne Elliott said the bank had no plans to use its capital buffer and operate with a common equity tier 1 capital ratio below 10.5 per cent (CET1 at March 30 was 10.8 per cent).
However, the bank would allow for the possibility as a short-term measure.
Asked if the bank could pay a dividend if it went into the buffer, he said there was no black and white rule. “It would depend on our plans and what our expectations are for generating capital.”
Westpac’s common equity tier 1 capital ratio at March 30 was 10.8 per cent. Westpac chief executive Peter King said the bank should be prepared to use it capital buffer if needed.