'Dangerously naive': APRA warns the worst is ahead

The banking regulator has warned against a “dangerously naive” assumption of an economic snap-back and told banks to delay a rush to rebuild capital buffers as it guards against “substantial” threats to financial stability.

Australian Prudential Regulation Authority chairman Wayne Byres said the watchdog would be pushing its work on governance, culture and remuneration back as it directs its resources to the “areas of greatest risk” as he put the banks on notice that the “real battles for the financial sector remain ahead”.

In a speech delivered overnight to the Board of the International Banking Federation, Mr Byres also urged lenders to give investors and shareholders as much information as possible to maintain investor faith in the banking sector and financial markets.

Treasurer Josh Frydenberg this week temporarily relaxed continuous disclosure laws following campaigns from the Business Council of Australia and the Australian Institute of Company Directors amid a sharp increase in shareholder class actions in recent years, in a move that has been attacked by institutional shareholders.

Mr Byres said “transparency will become even more important” to financial markets over coming months.

“Markets depend on information. In times of uncertainty, timely, reliable and accurate information is especially highly valued,” he said.

“We have learned from previous crises that if markets lose faith in any of those characteristics, they will tend to run first and ask questions later. We cannot afford that to happen.”

Mr Byres said companies should “not be tempted to panic and switch the lights off” in the mistaken view that it would be better for everyone to operate in the dark.

“We do not want analysts, investors or rating agencies to overestimate the size of the problem by assuming the worst in the absence of information. Even without regulatory prompting, banks should err on the side of revealing more rather than less,” he said.

“Ensuring financial and operational resilience will be the priority, because the threats are substantial,” he said.

“Measures to backstop liquidity have worked well and bought us time, but solvency pressures are mounting as credit risks come to the fore,” he said.

Although banks have deferred repayments on 703,000 loans worth more than $210 billion to date, economists and analysts are concerned of a “cliff” in government and financial support when borrower holidays and income support measures end or are tapered.

Westpac and ANZ recently deferred interim dividend payments after APRA cautioned against shelling out profits, following its guidance that banks could dip into capital buffers to weather the economic storm created by the COVID-19 pandemic. National Australia Bank significantly reduced its interim distribution.

Mr Byres said until there were “clear signs” of an economic recovery and banks were able to generate capital from retained earnings, APRA would be focused on capital management and stress testing of the banking sector.

Despite the banking sector adding tens of billions to capital buffers since a 2014 recommendation the lenders be “unquestionably strong”, Mr Byres said post-global financial crisis reforms may turn out to be “insufficient” and need to be strengthened following the pandemic.

“Maybe they just need to be reshaped a bit. I do not know. But inevitably there will be things we learn, and we should not allow a determination not to backtrack on reforms to deter us from improving them,” he said.

While APRA has not put a firm timetable on the restoration of capital buffers if they are whittled away, Mr Byres said lenders should do so “as soon as circumstances reasonably allow, but no sooner”.

“We should not be complacent about the rebuild, but there are also risks from rushing it,” he said.