Banks asked to prepare for negative interest rates
Banks have been told to draft plans to deal with the possibility of zero or negative interest rates by April 2022, with the aim to evade potential “operation challenges”.
The prudential regulator has asked the banks to develop “tactical solutions” to implement zero and negative market interest rates and cash rate by 30 April 2022, despite the Reserve Bank confirming on numerous occasions that a negative cash rate is highly unlikely in Australia.
Nevertheless, the Australian Prudential Regulation Authority (APRA) is of the opinion that the RBA’s assurances do no preclude the possibility of a negative cash rate in the future. As such, 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 zero at any time”.
In a letter addressed to “all authorised deposit-taking institutions”, Theresa McCarthy Hockey, an APRA banking official, said “tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems”.
“APRA considers the risks arising from an ADI’s lack of preparedness for zero and negative interest rates to be material since this could have significant implications for an ADI’s risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems, among other areas.
“Insufficient preparation for the possibility of zero and negative interest rates could therefore have an adverse impact on an ADI, its customers and the markets in which it operates.”
The banks have also been told to consider all aspects of the products and activities that are in scope, including customer communications and disclosures.
Further, ADIs are expected to assess the associated operational risks and ensure that there are appropriate controls in place to manage them.
“ADIs should also consider any relevant conduct-related issues, including the potential for conflicts of interest, fair treatment of clients, and asymmetry of information.”
This is not the first letter APRA has addressed to the banks. Namely, back in December 2020, the banks responded to APRA confirming they’re typically well placed to deal with zero and negative market interest rates. Some, however, admitted that zero or negative interest rates on their retail lending or deposit products would pose “operational challenges”.
The RBA has kept the cash rate at a record-low 0.1 per cent since November 2020 and has stressed the strategy is “lower for longer”, with rates said to lift only when the preconditions are created, a scenario it doesn’t expect before 2024.
The banks are being asked to provide their feedback to the expectations outlined in the letter by 20 August.
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