APRA welcomes IMF report on Australian financial system

The Australian Prudential Regulation Authority (APRA) welcomes the IMF’s Financial Sector Assessment Program (FSAP) report on Australia [1], which concluded that the Australian financial system has been further strengthened since the IMF’s previous assessment in 2012. The 2018 FSAP underscores the strength and resilience of the Australian financial system.

As part of the FSAP review, APRA was subject to a comprehensive assessment of its supervisory approach and capabilities in banking and insurance supervision. The IMF also assessed the adequacy of systemic risk oversight by APRA and other members of the Council of Financial Regulators (CFR), our crisis preparedness, and financial safety nets.

The IMF concluded:

• Australia benefits from a robust regulatory framework and that prudential supervision shows generally high conformity to international best practices, but with opportunities to strengthen practices further in some areas;
   
• bank capital requirements have been raised and applied more conservatively than minimum Basel standards, and Australian authorities have taken welcome steps to further strengthen the resilience of banks through stress testing programs;
   
• bank solvency appeared resilient to stress based on the IMF’s own stress testing exercise with the results broadly in line with stress testing undertaken by APRA;
   
• policy action has lowered financial stability risks in the banking system through the introduction of stronger lending standards, including the temporary restrictions on the growth of investor loans and the share of interest-only mortgages; and
   
• APRA has undertaken comprehensive reform of prudential regulation for insurance companies, while improving the consistency of the framework between life and general insurers since the IMF’s last assessment in 2012.

APRA Chair Wayne Byres said the FSAP had made positive findings on important issues of financial stability and resilience in the Australian system.

“APRA welcomes the FSAP findings and remains committed to continued improvement of regulatory frameworks and supervision practices.

“As I often emphasise, Australia’s financial system remains fundamentally sound due to a long program of work to lift capital ratios, establish a more stable funding profile, and increase holdings of liquid assets. Stress testing shows that Australian banks and insurers are resilient to significant shocks.

“In addition, the report notes the encouraging progress that has been made in strengthening APRA’s resolution powers and expanding banks’ recovery planning, as well as strengthening the coordination between Australian and New Zealand authorities in this regard.

“Amongst other findings, the report notes the need for additional investment in data and analytical tools to strengthen prudential supervision and systemic risk oversight. APRA has recognised this as part of its 2018-2022 Corporate Plan, which includes a major data transformation program to ensure APRA keeps pace with advancements in data, analytics and technology.

“This program will be the foundation through which we improve our supervisory effectiveness and also provide more information and transparency to the broader community about the financial health of the industries we supervise,” Mr Byres said.

Footnotes

[1] In 2018, Australia was subject to an objective and diagnostic assessment of financial stability and associated regulatory oversight via the Financial Sector Assessment program (FSAP) program conducted by the International Monetary Fund (IMF).