Banks told to prep IT systems for possibility of negative rates

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Banks told to prep IT systems for possibility of negative rates

By the end of April 2022.

Australia’s banks have been directed to prepare their IT systems to deal with the prospect of zero or negative interest rates by the end of April next year.

The Australian Prudential Regulation Authority (APRA) said today that it had written to the banks in December last year regarding the issue and potential ‘timeframes for rectification [or] mitigation.”

While noting Reserve Bank of Australia advice that “a negative cash rate is highly unlikely in Australia,” APRA noted this “does not preclude the possibility of a negative cash rate in the future”, nor did it preclude preparing for that potential eventuality.

APRA said that initial feedback from authorised deposit-taking institutions (ADIs) - aka banks - was that they are “typically well-placed to deal with zero and negative market interest rates on financial market products such as those typically managed in a treasury system.” 

“However, for some ADIs, zero and negative interest rates on other products (e.g. wholesale and retail lending and deposit products) would pose operational challenges,” the authority noted [pdf].

“Furthermore, a number of ADIs noted high costs and competing priorities as being constraints for the implementation of permanent solutions.”

APRA said that a “lack of preparedness” could be material for banks, if zero or negative rates came into play, and banks’ technology systems were insufficient.

“APRA expects ADIs to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by April 30 2022,” the authority said today.

“Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems, along with overrides in downstream systems.”

APRA is taking submissions from banks and other stakeholders on the issue until mid-August.

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