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From crisis management to heightened supervision: recapping APRA's latest banking announcements

The effects of the COVID-19 health crisis are still unfolding and present significant challenges to the Australian financial system. Unquestionably strong capital requirements have allowed banks to act as the initial shock absorbers for the domestic economy. However, the path ahead remains extremely uncertain as the Australian Government is now faced with the challenge of simultaneously addressing the health crisis and economic downturn.

In our last article on APRA banking announcements we gave detailed insights into the regulators immediate response to the Coronavirus crisis and unpacked what that meant for banking and financial professionals. In this article we outline key changes to the domestic regulatory environment since the Australian Government declared COVID-19 a global pandemic. We also summarise APRA banking announcements since May 2020 to help regulatory and reporting teams keep across recent developments.

The regulatory landscape

It has been nearly five months since the Australian Government declared COVID-19 a global pandemic and the focus for APRA has shifted from crisis management to heightened supervision. Speaking at a number of recent public engagements, APRA chairman Wayne Byers has praised the role that well-capitalised and highly liquid domestic banks have played in damping the economic impact of COVID-19. The timeline below summarises notable APRA and public announcements in relation to COVID-19.

While the June 2020 GDP figures have not yet been released, Treasurer Josh Frydenberg conceded Australia will enter a technical recession breaking its record of 28 years without one. The rhetoric from the Australian Government is shifting from managing the health crisis to addressing the economic crisis. Consequently, APRA’s focus on operational resilience and capital profiles is likely to intensify. The regulator has also started publishing detailed data on loan deferrals to make the strain on the financial system more transparent.

Key reporting announcements

ADI's risk management and contingency planning frameworks have been put to the test in recent months. APRA has also placed a number of additional COVID-19 related reporting requirements on the banking industry to help understand the initial economic impact of the pandemic and to inform public policy development. This is part of APRA’s role in acting as data conduit for financial system information to the Treasury, RBA and ABS. For that reason, it should come as no surprise that the majority of ARPA’s announcements have been on reporting treatments.

Looking at the regulator itself, APRA has announced changes to its internal supervision structure, moving towards an operational model which is aligned along three industries lines (banking, superannuation and insurance). APRA has also been more vocal about its collaboration with ASIC in the ME Bank redraw scandal and the ongoing AUSTRAC investigation into Westpac. These are both examples of APRA addressing direct recommendations from the Capability Review.

Additional reporting requirements

As the June 2020 reporting quarter comes to a close, so marks the end of the extended EFS parallel reporting period. However, any reporting reprieve in the new fiscal year will be short lived as additional liquidity reporting continues and the SME Guarantee Scheme collection matures. APRA will also be taking steps to embed its ad-hoc COVID-19 collection into a monthly reporting cycle.

The ARF 923 series, which builds on capital, credit quality, EFS and AASB 9 requirements, will become a key data source for APRA supervision and monitoring activities in the coming months. APRA’s rapid development and rollout of the ARF 920 and 923 collections again highlights the importance of entities having robust EFS processes to leverage off in quickly addressing new regulatory reporting requirements.

Regulatory reporting instruments detailed above do not affect entities on the same time horizon. This is most notable with the ad-hoc COVID-19 collection ARF 923 which was initially sought data from Australia’s largest 20 ADIs. Smaller ADIs – such as credit unions, building societies and mutual banks – with already limited reporting resources will be expected to deliver timely and quality data to APRA as the regulatory continues to increase its COVID-19 reporting requirements.

Other regulatory announcements

APRA has maintained its focus on operational resilience, capital profiles, liquidity and credit risk in managing the COVID-19 crisis. The regulator has issued a number of guidance notes to the banking industry with respect to existing capital, credit and market risk prudential standards. Specific guidance has been given on loan deferral reporting treatments and how this impacts the calculation of capital and liquidity measures.

The regulator has also started publishing data on the nature and extent of loan deferrals. APRA flagged that this data was submitted on a best endeavours basis by Australia’s largest 20 ADIs and it expects re-submissions as entities ad-hoc reporting processes mature. APRA will continue to publish loan deferral data on a monthly basis until it is no longer a notable component of the ADI industry’s total loan portfolio.

APRA has remained vocal about its approach to ease operational burden on banks to allow them more resource to direct towards supporting their customers and responding to the COVID-19 crisis. The regulator has said it will exercise flexibility where it is clear that a rigid adherence to regulatory requirements would amplify the shock of the pandemic. However, given all the FAQ updates on reporting treatments it is clear that data quality and timeliness is firmly on the regulators radar.

Looking ahead

The unfurling economic impact of the COVID-19 pandemic remains uncertain. APRA has flagged that loan deferral reporting will become a monthly feature in its statistics publications which will place further burden on regulatory reporting teams. Banks should expect more demand and scrutiny towards their operational, capital and liquidity data as regulatory monitoring activities intensify. Stress tests and other supervision activities which require data-driven insights from banks are likely to arise in the coming months as APRA plays its role in informing broader economic policy decisions.

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