A message from APRA Executive Director Sean Carmody

From savage bushfires to flooding rains and then a once-in-a-century pandemic, Australians have had much to contend with so far in 2020. Perhaps in time, however, we will look back with a wry smile at the Great Grocery Shortage, when the country’s supermarkets shelves were stripped bare of basic essentials. The sudden shift to working from home certainly placed pressure on distribution, but panic buying and stockpiling only exacerbated the problem. The shortage, therefore, was largely caused by those who feared a shortage and reacted accordingly – it became a self-fulfilling prophesy.

We can be thankful that when the COVID-19 crisis struck, the strength, safety and resilience of the Australian financial system was never seriously questioned. Financial institutions were able to step up and act as shock absorbers in the system due to the significant capital buffers built up over the past decade. But the panic shopping behaviour demonstrates how quickly anxiety can turn to fear and then panic, and why a strong financial system – and confidence in that strength – is so essential in times of crisis. Maintaining the resilience of the financial system has therefore remained APRA’s primary focus, and that has required a shift in our priorities and resources in response to the evolving crisis.

Once APRA saw the emerging threat posed by COVID-19, we began to mobilise, both to protect our own staff and operations, and to ensure Australia's financial system remained stable and regulated financial institutions could maintain their operations and support their customers.

To guide our supervisory response to the crisis, APRA established a cross-divisional team of senior executives to oversee the impact on financial institutions, which Chair Wayne Byres asked me to lead. While each industry-aligned supervisory division has maintained responsibility for engaging with individual entities, the new cross-divisional group has helped to ensure consistency of our approach and provided a forum for rapid decision-making.

There are some challenges presented by the crisis that are common to all industries, including those supervised by APRA – for example the ability to adapt working operations when many or all staff are working from home, dealing with travel interruptions and coping with the impact of disruption to suppliers. There are also some that are more specific to particular industries:

• Banking – making hardship allowances for mortgage and small business customers, and working through implications for financial reporting.
• Superannuation – managing the operational response to support the early release measure introduced by the Government to help mitigate the financial impact on people whose income was impacted by the crisis.
• Insurance – preparing for possible shifts in patterns of claims – in some cases the potential for new and higher levels of claims driven by the crisis; in other cases the potential for claims to reduce in the short-term but be pushed to a future period.

Although APRA has deferred much of its work on the focus areas outlined in our 2020 Policy and Supervision Priority plans, this doesn't mean the risks this work aimed to address have disappeared. In particular:

• cyber/fraud risks may be heightened in an environment where bad actors see opportunities as a result of the focus on the COVID-19 response;
• COVID-19 is a real-life test of many aspect of organisations' business continuity management plans. There will be a lot to learn from what works and what doesn't; and
• a crisis is always a test of leadership, creating tensions in balancing the speed and quality of decision-making, facing uncertainty but being very clear in communicating responses. While existing processes will have to adapt, a foundation of good governance and a strong risk culture will position institutions well in this test.

In this edition of APRA Insight, we take a closer look at APRA’s role during a pandemic, and the steps we’ve taken to protect financial soundness and stability during this difficult time. Separately, we examine how APRA’s restructure late last year has increased the organisation’s capacity to deal with the impacts of COVID-19.

With the superannuation sector in the spotlight as it deals with new measures regarding the early release of super, we also look at the prospect of further consolidation of the industry and debunk some myths about successor fund transfers.

Finally, in our latest APRA Explains, we examine the concept of risk-weighted assets, which plays an integral role in determining the capital requirements that are helping Australia’s banks, credit unions and building societies withstand the impact of COVID-19.