The prudential regulator has said Australia’s financial system remains strong but flagged several key issues that require vigilance and strong risk management.
The Australian Prudential Regulation Authority (APRA) has also appeared before the Senate economics legislation committee, answering a range of questions on the stability of the financial system.
In its opening statement, the prudential regulator said Australians can remain confident in the resilience of the banks, insurers, and superannuation trustees it oversees.
However, APRA also pointed to a range of emerging threats outlined in its latest System Risk Outlook, including geopolitical conflict, cyber and operational risks, and rapid technological change, which are reshaping the risk landscape in an increasingly interconnected world.
The regulator also pointed to emerging risks in global financial markets, including private credit.
While exposures in Australia remain relatively contained, APRA said offshore shocks could still feed through to the domestic system, with the regulator keeping a close watch on the sector.
APRA also reiterated its stance that the fundamentals of Australia’s financial system remained sound.
“Banks and insurers are well capitalised, liquidity positions are strong, and stress testing continues to show the system can withstand a range of severe but plausible scenarios,” it stated.
“This leaves the system well placed to continue supporting households and businesses, even if economic conditions deteriorate.”
Actions taken
In response to the evolving risk landscape, APRA said it is taking action across the system and within each of the industries it supervises.
The regulator said it continues to focus on both financial and non-financial risks in banking, including ensuring lending standards remain sound amid high household indebtedness, inflation, and rising interest rates.
“APRA is seeing a more uncertain and complex risk environment, shaped by geopolitical developments, technological change and evolving market dynamics,” it said.
“Our focus is on ensuring that resilience is maintained – through strong supervision, targeted action, and close collaboration with industry and our regulatory partners.”
System stress tests
APRA chair John Lonsdale also faced questions from Senator Kerrynne Liddle, who queried the regulator’s approach to stress testing among lending institutions.
Senator Liddle used the opportunity to ask whether the Treasurer, Assistant Treasurer, or Treasury had sought any advice from APRA on the potential impact of policy settings. However, Lonsdale said the regulator had not been asked to provide advice.
She also questioned whether APRA had provided advice on the interaction between the expanded 5 per cent Deposit Scheme and falling house prices.
“Before the announcement, as I’ve told this committee, we were asked for advice on the impact on LMI providers. To my knowledge, that was the only advice I’ve provided to the government,” he said.
[Related: APRA says banks and borrowers can ride out downturn]
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