Reserve Bank governor Philip Lowe raised similar concerns in December, saying the public policy case could emerge quickly for a CBDC which presented a risk to bank deposits, so he was talking to other central bankers about limits to cap the amount of funds that can be shifted into CBDCs during a crisis.
Dr Lowe’s comments came just days after Federal Treasurer Josh Frydenberg announced a shake up of Australia’s payments system, including Treasury and the RBA leading a review into the viability of a retail CBDC.
Mr Lowe’s speech signalled a stark turnaround from the RBA’s previous position that the “new payments platform” (NPP), which provides real-time electronic funds transfers, would be sufficient to ward off any potential threat from CBDCs.
US dollar-averse Chinese leading the way
Some observers say the pace of innovation by the People’s Bank of China to develop a digital yuan as a means of reducing reliance on US dollars for trade has prompted the renewed focus by regulators on CBDC.
Mr Byres said while APRA and the CFR did not view China’s rise as a threat, they were studying whether the overall shift toward CBDCs and the rise of a digital yuan could increase risks before creating regulation to “fix” it.
“I don’t know that I’d say it’s a threat that I worry about, but if you ask do we spend time thinking about those possible permutations, those scenarios? Yes,” he said.
“We have to look and try and understand it, but I think we’ve got to be careful not to sort of jump to the conclusions of saying, well, I know what the outcome’s going to be, and therefore I know what the problem is and so start mandating a solution to a problem that hasn’t yet arisen.”
While he played down the idea that China’s push to become the first big, global superpower to develop a meaningful digital currency would in itself pose a threat, others say Australia will need to move quickly.
Richard Turrin, author of Cashless, China’s Digital Currency Revolution, who has also worked with Commonwealth Bank of Australia, says local regulators and the RBA have been slow to recognise the momentous shift taking place in China and how quickly Australia’s Asian trading partners could start using their own digital currencies.
“China is a first-mover in CBDCs and other countries have realised they do a lot of business with China and they’re going to have one, so if this takes us away from the US dollar and makes it less expensive to transact we should make sure we do too,” Mr Turrin said.
Mr Byres warned that while APRA does not view the digital yuan as threat, big banks will need to keep pace with innovation or risk being dis-intermediated.
The regulator would not be seeking to protect the incumbent players to ensure financial system stability, he added. “That is an absolute risk if they’re not keeping up with innovation,” said Mr Byres.
“It’s not about protecting the incumbents. Ultimately, we’re about protecting the community, not protecting the banks per se, or the insurers or the super funds. Sometimes those things go in hand-in-hand, but ultimately, it’s about what’s in the community’s interests.”
A more normal, forward-looking agenda
Mr Byres said APRA had sought to return to its “normal, more forward-looking agenda” in 2021 after “fire-fighting” COVID-19 impacts in 2020, but would be prepared for anything, including the omicron variant in the year ahead.
“What does the latest variant mean?” Mr Byres said. “How are people going to respond to that? Will there be new restrictions? We just don’t know.
“So while the economic forecast at this point look relatively strong, no one really knows, and you have to be prepared for things not to be as good as you might otherwise hope they’ll be.
“The economic outlook is actually improving and the latest forecasts are improving again.”
Watch and wait on housing market
Mr Byres said APRA was waiting to assess the effect of its move to increase the minimum interest rate buffer banks apply when assessing the serviceability of home loan applications by 50 basis points, before taking any further action on the housing market.
“It’s really too early to tell what impact that had,” Mr Byres said. “We continue to watch how it’s playing out and both the impact of our measures, but also other dynamics within the housing market because you’ve seen, leaving aside the step we took, banks, for example, raising their own interest rates, particularly in fixed rates which have risen quite a bit in recent times.”
In November, APRA published a paper revealing it had asked banks to ensure they had “the ability to limit” lending to borrowers with a debt-to-income ratio greater than four times or six times, and to borrowers with loan-to-valuation (LVR) ratios greater than 80 per cent or 90 per cent.
Mr Byres said APRA remains keenly focused on debt to income ratios, which are at record highs, but he stopped short of foreshadowing any further action.
“Most recently, what we were concerned about in housing was the increasing incidents of people borrowing at very high multiples of their income,” Mr Byres said.
“That’s, that’s the focus area. That’s the one we’re paying attention to, but it’s a bit early to tell just yet what those factors that have played out over the last month will do or whether they’re going to have a long-lasting impact or whether the market will move in a different direction [this] year. So we’ll watch.”