The RBA governor says “we should not expect capital buffers to be maintained in a once-in-a-century event”.

During the recent earnings season, analysts probed bank bosses about how far capital levels will be allowed to fall, and the impact this would have on dividend decisions.
Mr Byres told a webcast, hosted by FINSIA, the fall in CET1 below the prescribed benchmark should be taken in perspective.
During the GFC capital levels were sitting at half the 11 per cent level at which the banks ended 2019, and three years ago no major bank had a CET1 of more than 10 per cent.
APRA giving the banks the green light to eat into the buffers was endorsed by Reserve Bank governor Philip Lowe, who said this was “entirely appropriate” given the circumstances.
“If there was ever a time to allow these buffers to be used, now is that time,” Dr Lowe said. “We should not expect these buffers to be maintained in a once-in-a-century event.”
Mr Byres, however, said the regulator expected banks to be prudent with the capital reprieve.
On April 7, APRA wrote to banks asking them to defer or materially reduce dividends until the outlook was clearer. This led NAB to materially cut its interim dividend, while ANZ and Westpac deferred decisions on theirs.
“Our message to make use of capital buffers to support economic activity has not, though, been without strings attached,” Mr Byres said.
“Capital can essentially be used for three purposes: to sustain and grow the business, to absorb losses, or to reward shareholders. We prefer capital buffers utilised for the first two.”
The outlook for dividends remains under a cloud, with Mr Byres saying that although he understood the importance of dividends to many investors, his mandate is to protect the safety of bank deposits.
We hope the impact on dividends from the current COVID-19 crisis will be temporary, but obviously the outlook remains highly uncertain,” he said. “For that reason, we firmly believe prudence is the appropriate strategy for the time being.
Mr Byres and Dr Lowe articulated their wish for banks to use their buffers to support households and businesses beyond the six-month payment holidays rolled out by the sector in response to the crisis.
Mr Byres said it was difficult to make projections due to the nature of the crisis and those involved in “building the bridge” to the other side needed to remain flexible.
“September-October is still a long way away, we will have a lot more information by then,” he said.
“Well understand the nature of the problem better. We want to make sure it doesnt become a cliff and we hit a cliff and all that support disappears at once.”
Commonwealth Bank boss Matt Comyn said last week that banks would be checking in with customers in the next few months, and encouraging those who could start repayments to do so.
Dr Lowe said it was understandable and desirable for banks to extend their assistance beyond the lockdown period and help foster the eventual rebound.
“It is in the banks’ own interest and in the interest of the broader Australian community that banks support their customers now, and also support them in the recovery phase when credit will be needed so that businesses can once again expand,” Dr Lowe said.
ASIC chairman James Shipton said it was not a matter of waiting until the end of lockdown to see what could be done to assist those who needed it, urging banks to do what they could now to help the customers in the future.
“Check in with customers to see what is happening now and see if a decision made a few weeks or months ago still stands. All of us need to lean into this challenge,” Mr Shipton said.
Mr Byres defended the regulator’s decision to pause its policy and supervisory agenda until August and accepted that many streams would realistically not be restarted until next year.
The delays were not an admission they were misguided, but to give critical components of the financial architecture the time and resources to maintain service levels, while allowing APRA to remain focused on what really mattered.
“For the industry and APRA, COVID-19 has been a case of all hands on deck,” he said. “We will come back to our broader agenda once we have a better sense of the landscape ahead of us.”