Powered by MOMENTUM MEDIA
Powered by MOMENTUM MEDIA
SUBSCRIBE TO OUR NEWSLETTER SIGN UP
Powered by MOMENTUM MEDIA

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.

Financial system is ‘more resilient’ thanks to APRA, finds review

apra

apra
Annie Kane 8 minute read

APRA’s “rigorous and effective” intervention and management of the “growing risks” in mortgages have helped make the financial system “more resilient”, the APRA Capability Review has found.

The conclusion comes in the APRA Capability Review, which was called by government earlier this year to assess the regulator’s capacity and capability to promote financial stability within its frameworks and its preparedness to address issues raised by the royal commission and in “an environment of growing complexity and emerging risks for APRA’s regulated sectors”.

The review was led by the former chairman of the Australian Competition and Consumer Commission and president of the National Competition Council, Graeme Samuel; alongside former Westpac senior executive Diane Smith-Gander, and the Reserve Bank of New Zealand’s former head of financial stability, deputy governor, and acting governor, Grant Spencer.

It reportedly involved reviewing more than 1,000 APRA documents, analysis of information from seven international “peer regulators”, meeting with APRA’s senior leaders on over 30 occasions, “extensive and insightful consultations” with more than 30 stakeholders, hosting five roundtables with “key industry experts and international prudential regulators”, evaluating 19 written submissions, as well as a “quantitative and qualitative staff survey and focus groups”.

The final report of the Australian Prudential Regulation Authority (APRA) Capability Review, released on Wednesday (17 July), noted that APRA’s approach to traditional financial risks is “rigorous and effective”. 

According to the Capability Review panel, APRA’s focus on housing risks is “entirely appropriate” given that housing represents 64 per cent of assets in the Australian banking system in dollar terms and 36 per cent of the banking system when considered in risk-weighted asset terms.

The panel said that APRA had “developed strong capabilities” in managing risks emanating from exposures to housing and had “mobilised significant resources in the past few years to address concerns about increasing risks in residential mortgage books”.

For example, it highlighted that between 2014 to 2018, APRA “steadily strengthened system-wide mortgage lending standards, reversing an earlier erosion in policies and practices that had flowed from strong competitive pressures”. 

Advertisement
Advertisement

Some of APRA’s recent interventions in the residential mortgage market include restrictions on investor and interest-only lending, which the panel said “have had the desired effect of reducing risk that had been building up in residential mortgage books”.

“These measures have strengthened the resilience of individual ADIs and promoted the stability of the financial system overall,” the report reads.

However, the final report noted that while APRA has “appropriately taken a risk-based approach in supervising credit risk, increased capacity in non-retail credit is warranted,” it concluded.

It also suggested that the prudential regulator “needs to be more transparent about its ownership and approach to these policies, including the important supporting role of the Council of Financial Regulators”.

The capability review report concludes: “APRA’s efforts to build capital requirements, strengthen balance sheets and tighten lending standards in the residential mortgage market in the past few years have made the financial system more resilient. But this is no guarantee against a financial failure or crisis.

PROMOTED FEATURES


“APRA needs to continue to enhance its preparedness for a market-wide crisis that affects multiple entities and its capacity to respond to a single distressed entity in collaboration with the Council of Financial Regulators’ members.”

Recommendations

In total, the review put forward 24 recommendations to “ensure that APRA is best placed to deal with its future environment and the challenges which lie ahead”. 

Nineteen recommendations are made to APRA and five recommendations require government action.

Among the biggest changes the review puts forward in its recommendations to APRA are:

  • Creating a competition champion within APRA, having the quality assurance function test how policies are developed and applied by supervisors, and reporting regularly on competition developments in its external accountability assessment;
  • Building credit risk capacity to simultaneously maintain high supervisory intensity in both non-retail and retail credit risk;
  • Asking APRA’s chair to relinquish his ADI-specific oversight role and adopting a broader organisation-wide role with remaining members splitting their roles to include a mix of industry, policy and functional responsibilities;
  • Creating a new superannuation division, headed by an executive general manager;
  • Publishing objective benchmarks on superannuation product performance and publicly taking action to demonstrate its expectations for super member outcomes, updating its superannuation reporting standards and collecting product level data that facilitates accurate assessments of outcomes and comparability across funds; and increasing the resourcing dedicated to the superannuation industry;
  • Advising the government of its current state of its resolution capability and crisis preparedness to assess whether additional resources are required to advance this work (to be done before the end of this calendar year);
  • Augmenting its internal capacity and to collaborate on ways to strengthen the cyber resilience of APRA’s regulated sectors; and
  • Building in more “CBA-style prudential inquiries” as an ongoing part of its supervisory toolkit to “reinforce the need for rigorous self-assessments”, making its recent GCA self-assessment process a biennial requirement and rolling this out across retail and industry superannuation, insurance and ADI entities

The five government recommendations centre on:

  • Giving APRA a non-objections power to veto the appointment or reappointment of directors and senior executives of regulated entities in a bid to help “pre-emptively regulate GCA risks”;
  • Removing APRA from the application of the APS Workplace Bargaining Policy;
  • “Reviewing the adequacy of penalties” across APRA’s legislative framework, providing APRA with the power to appoint a skilled person to undertake a review of a regulated entity; and enhancing its private health insurance licensing powers;
  • Streamlining and improving the effectiveness of existing accountability arrangements when establishing the financial regulator oversight authority; and
  • Legislating to make APRA’s member outcomes mandate more explicit. The government should clearly outline its expectations for APRA on superannuation in its next Statement of Expectations.

The review concluded: “There are no simple solutions to raising APRA’s capabilities. It operates in a complex, uncertain and dynamic environment. It requires highly skilled staff with good judgment and courage. They need to be supported by strong leadership and technology. 

“APRA also needs to use its independence, powers and authority to greater effect to shape its future. The areas of improvement identified in the review are mostly for APRA to respond. Cultural change is necessary. A culture that has facilitated success in regulating traditional financial risks can be a constraint on innovation and capability development. There needs to be more internal challenge of management to ensure that the organisation adapts with developments in the financial system and addresses the breadth of its mandate. 

“APRA needs to be more transparently assertive in its communication. This is particularly the case with regulated entities but also applies to communication with the Parliament and the public so that APRA can better define its authority and shape its own future. These changes need to come from the top and be embraced throughout the organisation.”

APRA has said that it supports all 19 recommendations, with APRA chair Wayne Byres saying the report was “comprehensive and ambitious” in its views of APRA’s future remit and required capabilities.

However, he warned that these should not be at the cost of APRA’s strong capabilities in financial safety and stability.

“The report highlights the increasingly complex industry dynamics in which APRA operates and that the expectations of its role and mandate have increased. 

“Appropriately, the report notes APRA has not stood still in the face of these developments, but highlights the need to accelerate the necessary changes if APRA is to remain a successful prudential supervisor into the future,” Mr Byres added.

“APRA is committed to ensuring it is fit for the future, and the panel’s recommendations support this. APRA will continue to focus on its primary responsibility to protect the financial wellbeing of the Australian community as it implements the changes that have been recommended and those APRA already has underway,” he said.

Treasurer Josh Frydenberg has already agreed to all recommendations of the report.

He said: “In response to the review, the government will:

  • Ensure that APRA has sufficient powers and flexibility to prevent inappropriate directors and senior executives from being appointed or re-appointed to regulated entities, as part of extending the Banking Executive Accountability Regime;
  • Consider changes to APRA’s regulatory framework, including a review of penalties, amending its private health insurance licensing powers and providing APRA with the power to appoint a person to undertake a review of a regulatory entity;
  • In establishing the Financial Regulator Oversight Authority, streamline and improve the effectiveness of both APRA and ASIC’s accountability arrangements;
  • Outline its expectations for APRA on superannuation in its next Statement of Expectations; and
  • Work with APRA and the Australian Public Service Commission to better understand and address any restrictions within the current APS Bargaining Framework in order to ensure APRA can attract and retain high-skilled staff.”

Mr Frydenberg continued: “An independent, robust and effective prudential regulator is essential for safeguarding the financial safety and the financial stability of the Australian economy. 

“The government is confident that the response it has announced today, alongside action from APRA, will ensure that APRA is in a position to effectively respond to these new challenges and deliver on its mandate.

“The government would like to thank the expert panel that conducted the review.”

Financial system is ‘more resilient’ thanks to APRA, finds review
apra
TheAdviser logo
apra
Annie Kane

Annie Kane

Annie Kane is the editor of The Adviser and Mortgage Business.

As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts. 

Email Annie at: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 

more from the adviser
house coins ta Aussie reports record spike in pre-approvals

The major brokerage has reported a record increase in home loan p...

Money jar Facebook launches SME grants program

The social media giant has commenced processing applications for ...

uptick Aggregator reports surge in settlements

Purple Circle Financial Services has reported a record increase i...

FROM THE WEB