Reserve Bank of Australia governor Philip Lowe and APRA chair Wayne Byres have called on the big banks to support the Australian COVID-19 recovery, rather than their shareholders.
Speaking during a FINSIA webinar, Lowe said over the past decade APRA had worked with banks to reduce liquidity risks, leaving Australian banks in a strong position to whether a financial crisis.
However, he said those capital and liquidity buffers the big banks have built up in the good times should be used to support the economy - not to support shareholders.
"If there was ever a time to allow these buffers to be used, now is that time," Lowe said.
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"We should not expect to see capital buffers be maintained during a once in a century shock. These buffers have been built up to be used in an event such as this."
The RBA governor said a reduction in a capital buffer ratios would be entirely appropriate as lenders "support customers" during the COVID-19 downturn.
"It's important that lenders continue to support the flow of capital to the economy," Lowe said.
Byres too said he wants Australian banks act as "shock absorbers" for the economy.
"Bank capital ratios have been at historical highs. That capital has been built up precisely so that banks are able, in times of stress, to absorb losses and sustain the flow of credit to the broader economy," Byres said.
"Now is the time to allow that to happen. It means capital ratios will come down over the year ahead: that should surprise no one."
Byres added that he hopes capital buffers are not used to pay shareholders dividends during an economic contraction.
"Capital can essentially be used for three purposes: to sustain and grow the business, to absorb losses, or to reward shareholders," he said.
"We prefer capital buffers utilised for the first two. As a result, we wrote to banks and insurers in early April asking that they seriously consider deferring, or at least materially reducing, discretionary capital distributions in the months ahead."
The call for banks to do their bit came as Lowe shared his bleak economic outlook.
"We are clearly living through the biggest and the most sudden economic contraction since the 1930s," Lowe said.
"Unlike previous contractions this one is not being caused by a financial event or by macroeconomic policies but by society's efforts to contain a pandemic."
He cited last week's Australian Bureau of Statistics data which showed 600,000 Australians had lost their jobs in April and another 750,000 had been stood down (or were on zero hours).
"Total hours worked in Australia fell by an unprecedented 9% in April. It's a staggering number," Lowe said.
Read our full COVID-19 news coverage and analysis here.