APRA has issued a new letter to authorised deposit-taking institutions (ADIs), releasing draft standards for consultation.
The regulator has spelled out a proposed expectation for the banks, that they should take reasonable steps to prepare for a scenario in which the cash rate may fall to zero or below – despite the Reserve Bank stating that a negative rate is highly unlikely.
Governor Philip Lowe has previously insisted the cash rate will be maintained at its current record low of 0.1 per cent, for as “long as necessary”, until a raise forecast for 2024.
“This however, does not preclude the possibility of a negative cash rate in the future,” Therese McCarthy Hockey, APRA executive director for the banking division wrote in the letter to ADIs.
“Irrespective of the level of the cash rate, it is possible that other interest rates determined in the financial markets could fall to zero or below at any time.”
As laid out in the proposed standards, APRA would expect the banks, at a minimum, to develop “tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022”.
All products and activities could fall under the expectation, with the exception of loan products that do not reference the cash rate or a market rate.
The banks are also expected to consider all aspects of affected products and activities, including customer communications and disclosures; operational risks and controls; and conduct-related issues, such as conflicts of interest.
The regulator revealed that it had written to the banks in December, asking about how prepared they are for zero and negative rates, and requesting those who weren’t to supply details around their issues and time frames for mitigation.
The banks generally indicated they are well placed to deal if the RBA decides to hit zero, but for some, APRA warned, negative rates could pose “operational challenges”.
Some ADIs had also noted high costs and competing priorities, such as constraints around the implementation of permanent solutions.
The regulator has referred to a prudential standard that requires banks to maintain a risk management framework to manage material risks.
APRA has said it considers the risks arising from lack of preparedness for zero and negative rates to be material since it could have significant implications for a bank’s operational processes, product disclosures, IT and accounting systems among other areas.
The industry consultation will be open until 20 August.
APRA has signalled that it intends to finalise its zero and negative interest rate expectations by 31 October.
