11 Mar

'APRA demands coronavirus testing' Richard Gluyas, The Australian

APRA will be holding meetings with senior financial services industry executives in coming days to closely monitor the impact of the coronavirus on their operations, as the major banks on Tuesday signed off on comprehensive risk analysis of their businesses for the regulator.

The Australian Prudential Regulation Authority’s tightened supervisory leash came as ANZ chief executive Shayne Elliott played down the likelihood of a ­recession.

“I think it’s still a pretty low probability,” Mr Elliott told an Australian British Chamber of Commerce lunch in Melbourne. “I think the government’s got the intent, the will and the tools to act.”

Equity markets, meanwhile, continued their rollercoaster, with local stocks closing 3.1 per cent higher after an extraordinary 7 per cent turnaround due to the Trump administration in the US flagging an aggressive stimulus program. Major banks sold off heavily on Monday’s global market crash led the rebound on Tuesday.

At the same time, the Reserve Bank has been closely monitoring levels of liquidity in the banking system.

While credit markets are functioning, financial market conditions around the world have tightened considerably in recent weeks, with high-yield debt markets coming to a standstill.

APRA has stepped up its response to the worldwide corona­virus crisis, in recent days asking the nation’s biggest banks, insurance and superannuation companies to complete detailed risk and impact assessments.

Last month APRA had asked the financial players to detail their pandemic action plans in the first phase.

In the latest round, the lengthy impact assessments, which varied depending on the institution, covered about 10 different categories of risk, including funding, liquidity and financial measures, the impact on staff, and the effects on payments and settlements.

The institutions also had to examine specific sectors they had exposure to that are considered to be relatively high-risk to fallout from the virus, such as tourism, education, airlines and airports.

As part of phase two of APRA’s investigation, senior executives from regulated entities — typically chief financial officers and chief risk officers — are being interviewed by senior APRA officers.

Commonwealth Bank executives are understood to have been interviewed on Monday, with the other banks lined up this week.

CBA declined to comment on any specific discussions with the ­regulator. However, a spokesman said the bank had been closely liaising with APRA to ensure that any potential disruption to the financial system caused by the COVID-19 outbreak was “kept to a minimum”.

Late on Tuesday Commonwealth Bank outlined a range of measures and support available to customers and businesses in response to the spread of the virus.

“Australia has a strong and ­stable financial system and ­economy, and we recognise the important role we play to support our customers, our people, our suppliers and the economy,” CBA chief executive Matt Comyn said.

“We are assessing the impact on our operations on a daily basis.”

APRA confirmed in a statement that its coronavirus response had moved to assessment of the financial impact of the outbreak, after satisfying itself that major institutions were “very alert” to the risks to their businesses and had initiated appropriate contingency planning to deal with a range of scenarios.

Targeted testing of the plans was under way.

“More broadly, APRA is regularly engaging with entities about potential or actual financial and operational impacts on their businesses, and has asked regulated entities to proactively notify APRA of any material changes to their business activities resulting from the outbreak,” the regulator said.

“Finally, we are adjusting our supervisory plans where necessary to take account of the current environment.”

APRA said it would respond as needed to protect the financial interests of bank depositors, insurance policyholders and superannuation members.

Mr Elliott said ANZ had been preparing for this kind of event for the last four to five years, simplifying its business and building its capital base from one of the sector’s lowest to one of its highest. While the bank had more to do, it was in “really good shape to withstand whatever headwinds come our way”.

The government, he said, had rightly highlighted small business as a vulnerable sector because of its reliance on cash flow.

There were three categories of small businesses facing challenges as a result of the virus: those with interrupted supply chains, those with large customers affected by the outbreak, and those suffering because customer behaviour had changed.

“We haven’t seen that many people getting into trouble and putting up their hand and saying: ‘I need help’,” Mr Elliott said.

“But that will come and we’re preparing for it.

“The sad thing in Australia is that we’re getting quite good at crisis response.”

As for a wave of potential bad debts from corporate collapses, Mr Elliott brushed off some forecasts that impairments could spike by 50 per cent.

“Credit losses in the Australian banking system have never been lower,” he said. “The 30-year running average for ANZ indicates an expected loss of 26 basis points (of gross loans), and at the moment we’re running at 10 basis points. So the banks are in good shape — never had lower losses, never had higher capital.”

Further, the bank’s exposure to an energy shock was relatively small, with thermal coal amounting to 0.1 per cent of the balance sheet, and the global exposure to oil and gas about 1 per cent.

“These dislocations will have an impact, but cheaper energy means more money in people’s pockets which is a natural balancing item in a crisis like this,” Mr Elliott said.

 

Richard Gluyas, The Australian

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