Australia’s prudential regulator has said banks and borrowers are well placed to ride out a downturn, yet cautioned that geopolitical tensions were reshaping how risks could hit the system.
The Australian Prudential Regulation Authority’s (APRA) latest System Risk Outlook has concluded that the financial system is entering this phase of the cycle from a position of strength, even as it steps up supervision and flags a more complex risk backdrop.
APRA said the Australian financial system, including APRA‑regulated banks, remained resilient and was “well-positioned to absorb shocks and continue providing services to households and businesses – even if economic conditions deteriorate”.
The regulator noted that banks and insurers held “strong financial resources well above regulatory minimums” which, in its view, gave them the capacity to “absorb losses and continue providing essential services during stress”.
To test that claim, APRA pointed to recent scenario modelling and said stress‑testing indicated that the system could withstand “severe but plausible” events, such as a deep global recession without breaching minimum prudential requirements.
APRA also made clear that it was not taking that resilience for granted.
The regulator said it had intensified its oversight of banks, insurers, and superannuation funds in light of developments at home and overseas.
AI, cyber, and geopolitics raise the stakes
A core theme in the report was that the threat landscape was changing, even if headline metrics looked comfortable.
APRA warned that geopolitical tensions, rapid technological change, and deeper global interconnectedness were altering how shocks could arise and spread through the financial system.
The regulator noted that artificial intelligence was being adopted “rapidly across all regulated industries”, opening up new ways to lift efficiency and innovate products.
However, it cautioned that “governance arrangement had not matured at the same pace”, signalling many companies did not have adequate frameworks in place.
APRA also said cyber risks were becoming more sophisticated, including through the use of “highly advanced AI models” and that threat actors and attack patterns were increasingly influenced by geopolitical developments.
Housing market: Resilient households, hot investor segment
On the domestic credit side, the regulator said households were operating in a “more challenging economic environment”, with higher interest rates and inflation “placing greater pressure on household finances”.
It outlined that Australians remained highly indebted and that housing credit growth was still firm, yet stated there were early signs of moderation in both credit expansion and dwelling price gains.
Within that picture, investor lending stood out, with APRA reporting that new lending to housing investors had been “very strong over the past year” and that investor credit growth was running at about 10 per cent over the year to March – the fastest pace in a decade.
Despite fierce competition for investor business, the regulator said lending standards “had not eased”, with serviceability tests and risk metrics still in line with expectations.
Looking ahead, it said it expected higher rates, weaker sentiment, and slower price growth to cool investor appetite.
APRA’s message on borrowers was cautiously reassuring, noting that borrowers and lenders exposed to housing had retained a “high level of resilience” and that many households had built up sizeable cash and equity buffers during and after the COVID‑19 period, larger than those held before the pandemic.
[Related: APRA demands ‘step change’ in financial sector AI controls]
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