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APRA updates guidance on capital management for banks and insurers

Wednesday 29 July 2020

The Australian Prudential Regulation Authority (APRA) has updated its capital management guidance for banks and insurers, in particular easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19.

APRA’s updated guidance replaces its recommendation in April this year that banks and insurers “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”.

Uncertainty in the economic outlook has reduced somewhat since then, and APRA has had the opportunity to review banks’ and insurers’ financial projections and stress testing results. Taking these and other developments since April into account, APRA has today written to banks and insurers advising they should maintain caution in planning capital distributions, including dividend payments. 

In additional guidance for the banking sector, APRA has indicated that for the remainder of the calendar year boards should: 

  • seek to retain at least half of their earnings when making decisions on capital distributions (and utilise dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible);
  • conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity; and
  • make use of capital buffers to absorb the impacts of stress, and continue to lend to support households and businesses. 

APRA Chair Wayne Byres said the updated guidance balanced the need for banks and insurers to keep supporting households and businesses, while also maintaining a prudent approach in the face of a very sharp and severe economic contraction.

“Today’s announcement strikes a balance in recognising the strength of the financial system, while at the same time acknowledging the difficult path ahead,” Mr Byres said. 

“Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by COVID-19. On that basis, APRA believes that banks and insurers do not need to continue to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy.

“In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from COVID-19, and restrictions on dividends from their New Zealand operations. APRA has therefore set an expectation that dividend payout ratios for ADIs will be maintained below 50 per cent for this year.”

APRA’s letter to ADIs also highlights the importance of utilising current capital buffers to absorb losses and meet the needs of customers.

“The years spent building up the capital strength of Australia’s banking sector to historical highs have been precisely for a time such as this. Further, APRA is committed to ensuring any rebuild of capital buffers, if required, will be conducted in an orderly manner,” Mr Byres said.  

APRA’s letter to ADIs is available at: Letter to authorised deposit-taking institutions - Capital management.

APRA’s letter to insurers is available at: Letter to all insurers - Capital management.

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.