By guest contributor Ken Atchison, CEO, Atchison Consultants
APRA has advised the banks that they may, temporarily, use a strong capital position for increased lending. They have also indicated that the banks might reduce dividends. This approach is indicative of APRA’s focus on capital buffers without regard to the counter-cyclical role these buffers would provide in times of stress.
After an extended period of subdued growth, private credit finally showed encouraging growth in January and February 2020. As shown in Chart 1 both housing and business credit were growing.
Then the coronavirus impact emerged. A time of stress is now upon us.
Constraints on bank lending have been part of the establishment of substantial capital buffers set by APRA in the wake of the GFC over a decade ago. As a result, money growth has been slower than it would have been in the absence of APRA’s directives to the banking sector. This has meant that reductions in interest rates by the RBA in recent years have had a minor impact on growth in lending. Essentially, APRA’s directives have largely negated RBA monetary policy.
Chart 1
Action by the national cabinet, established with the emergence of the coronavirus, has been directed towards both the health issue and the continuation of business activity in Australia. Federal and state government spending has been committed on a large scale. Monetary policy, through interest rate reductions and provision of liquidity (cash) by the RBA, is expected to provide stimulus.