By Paulina Duran
SYDNEY (Reuters) - Australia's prudential regulator told banks on Monday they must have a plan to deal with the possibility of zero or negative interest rates by April 2022, after a consultation showed such rates could pose "operational challenges" in some instances.
While the Reserve Bank of Australia has repeatedly said that a negative cash rate in the country is highly unlikely, the Australian Prudential (NYSE:PUK) Regulation Authority (APRA) said "it is possible that other interest rates determined in the financial markets could fall to zero or below zero at any time."
APRA is thus asking banks to take "reasonable steps" to prepare for such a scenario and to "at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022."
"Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems," said Therese McCarthy Hockey, an APRA banking official, in a letter addressed to banks.
"APRA considers the risks arising from (a bank's) lack of preparedness for zero and negative interest rates to be material since this could have significant implications for (its) risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems among other areas."
While banks said during the consultation period that they were well-placed to deal with zero and negative market rates on financial products typically handled by their Treasury systems, others said such rates on their retail lending or deposit products, for example, would pose "operational challenges."
"Insufficient preparation for the possibility of zero and negative interest rates could therefore have an adverse impact on (a bank), its customers and the markets in which it operates," McCarthy Hockey added.
Australia's cash rate has remained at a record low of 0.10% since November 2020. Yields on short-term government notes turned negative for the first time ever last month.
APRA's consultation period began in December and will continue until August 20, before the regulator finalises its expectations by October 31.