Risks to financial stability ‘are contained’, APRA suggests

The Australian Prudential regulation Authority (APRA) is engaging with banks to ensure they are “working proactively with affected customers”, a Senate committee heard on Wednesday (15 February).

Though rising interest rates, falling asset values, and impacts to borrowers remain the most discussed issues in the banking sector, the system remained in good shape, the regulator has assessed. 

Speaking to the Senate Economic Committee in Canberra, APRA chair John Lonsdale covered a range of issues affecting the overall Australian financial.

“APRA, alongside peer regulators and the industry, will continue to scrutinise impacts to the economy particularly mid-year when many fixed rate loans are due to expire,” Mr Lonsdale explained.

“A significant proportion of housing credit on low fixed rate terms will expire this year.

“APRA is engaging with banks to ensure that they are working proactively with affected customers,” he assured the committee.

He said that although some ‘pockets of stress’ are likely to emerge this year, overall “prudential indicators suggest that risks to financial stability are contained.”

“Prior prudential measures aimed at strengthening banks’ balance sheets and their lending standards mean that the system is well placed to absorb a more challenging period while continuing to meet the credit needs of households and businesses,” Mr Lonsdale confirmed.

As capital buffers were well above minimum requirements, APRA’s latest stress testing had indicated that the banking sector will remain ‘resilient’. 

“Put simply, credit continues to flow and bank lending standards are holding up.”

“While there are clouds on the economic horizon, Australians can have confidence in the strength and stability of the system to ride out the conditions,” he stated.

Strengthening ‘operational resilience’

Global implications have also played a role in how APRA is checking and prepping Australia’s financial system.

Mr Lonsdale explained that APRA’s obligation as prudential regulator means “we must have our eye on events playing out in the present” while also “scoping and preparing for long-term risks.”

“There has been much work undertaken over recent years to strengthen and build resilience in the system and prepare the industry for any potential downturn,” he flagged.

“Our 2023 policy and supervision priorities continue this work to increase resilience, standards and capability across the industry for the benefit of all Australians,” he said.

Specific areas of note in support of customers included: strengthening ‘operational resilience’ – which he highlighted as a critical lesson from COVID-19; bolstering cyber security across the sector; and preparing for climate change impacts, particularly in relation to insurance availability and affordability.

“Our forward-looking agenda also includes initiatives to modernise the prudential architecture and improve data collection across the industry,” Mr Lonsdale added.

“These initiatives will help make the regulatory framework clearer, simpler and more adaptable while also improving the quality and transparency of information available,” he said. 

APRA changing to adapt better practices

Senators have now been updated as to changes occurring at APRA as it seeks to improve the organisation's capabilities.

As Mr Lonsdale summarised: “I am proud to report that we achieved an 81 per cent employee engagement score late last year and have strong commitment from our people in areas including purpose, understanding of goals, collaboration and inclusion.” 

“Nonetheless, in an environment of rapidly occurring change and where long-term risks may pose systemic impacts to the sector, it is appropriate we invest in our capabilities and have the right operating model in place.

“Hence, we have made changes to our organisation at a senior level to include a new division focusing on technology and data, and another which will improve efficiency and ways of working across the executive group.

“Leader appointments have been made and operational excellence is a focus for the organisation,” he confirmed.

Industry feedback now being sought

APRA’s bi-annual stakeholder survey has opened to the industry this week. The regulator has outlined its importance in how it provides feedback to APRA can “continue to work collaboratively with entities, with the higher mission of protecting the financial interests of all Australians.”

These inputs will be provided to the Financial Regulator Assessment Authority (FRAA), Mr Lonsdale confirmed.

“Alongside forums such as this one, APRA values the accountability that the FRAA review provides and we look forward its recommendations later this year,” he said. 

[Related: Senate to hold regional banking inquiry]