Therese McCarthy Hockey remarks to FINSIA’s The Regulators event
Good afternoon.
It’s great to see so many of you here to engage in this dialogue with regulators including APRA’s priorities.
Today we’ll be looking at how APRA seeks to maintain the safety and stability of both the institutions we regulate and the financial system which is a key contributor to Australia’s economic prosperity.
Let me start by asking you... who here thinks that there’s considerable uncertainty in the financial outlook? Does anyone think that there’s a relatively calm and certain outlook? So if you haven’t put your hand up, perhaps you’re on the fence?
The good news is that APRA’s strategic plan is the right one for the times.
The past few years have presented social and economic challenges for many Australians, first with the pandemic followed by sustained cost of living pressures brought about by high inflation and rising interest rates. Despite this, Australia’s financial system has largely avoided any serious stress. Fiscal and monetary policy support helped to keep people in jobs; credit growth for both commercial and residential property continues to grow steadily; insurer profitability has stabilised; and superannuation returns have bounced back to record strong growth over the last 12 months. [Even during last year’s period of global banking turmoil, the “unquestionable” strength of our banking system saw us through largely unscathed]. As trying as conditions have often been for households and business owners, Australians could be assured of the safety of their bank deposits, the security of their superannuation savings or the ability of insurers to cover their claims.
The real test for APRA as a prudential regulator, however, doesn’t come when economic conditions are benign or just mildly troubling. It’s only in a crisis that we truly learn if the financial system can act as an economic shock absorber – keeping money flowing so that households and businesses can buy goods and services, pay their bills and make investments. Preparedness for such a downturn is essential at any time, but especially so right now as we face an increasingly volatile geopolitical environment with rising concern over the economic outlook for our main trading partner.
The results of APRA’s annual authorised deposit-taking institution stress tests have long given us confidence in our banking system’s readiness to cope with a “severe but plausible” downside scenario. But the growing interconnectedness of the world’s financial system, and increased systemic significance of the superannuation industry, means that APRA has begun to take a broader view of how risks can play out across the multiple industries.
So now I come to the first of our big priorities for 2025 - our first system-wide stress test
To be known as the System Risk Stress Test, it is due to get underway in the first half of next year and will specifically focus on interconnections between the banking and superannuation systems, and potential impacts on the broader financial system. At the moment, we are engaging with industry and fellow Council of Financial Regulators agencies on the design of the activity, including the hypothetical scenario we will examine. The scenario will contain significant disruptions to financial markets, which will help us explore the impacts of liquidity stress between super funds and banks, and how their response impacts asset markets. An operational risk component will be added to the scenario to further the dislocation caused by the market disruption. In addition to deepening APRA’s and industry’s understanding of transmission channels between industries, we expect there will also be learnings around how best to run such exercises in future. That will especially be the case for superannuation trustees, who typically have less stress testing experience and capability than the banking sector.
Closely related to the financial system’s readiness to withstand a crisis is the issue of operational risk: the capability to proactively manage the risks that arise from operating a business, whether an electricity blackout, industrial dispute or building fire. July’s CrowdStrike outage, which impacted millions of Windows systems globally, was a great illustration of why APRA has a new prudential standard on operational risk management coming into force from the first of July next year. Noting the difficulties some of our regulated entities have had complying with our prudential standard on information security several years after it came into force, we are keeping a far closer eye on industry implementation of the new CPS 230 Operational Risk Management. Which brings me to our next big priority area: APRA will continue to engage with banks, insurers and super trustees, as well as industry bodies and professional services firms, to ensure the industry is on track to comply with the new standard from 1 July 2025.
Turning now to a third major priority – building a better understanding of the impacts of climate risk on the financial system. Natural disasters linked to climate change present a threat to business continuity we are likely to see more of over coming years. To illuminate this risk, APRA is leading a Climate Vulnerability Assessment focused on the general insurance industry. Involving Australia’s five largest household insurers, the CVA examines the potential impact of climate change on household insurance affordability out to 2050. The insights from this initiative will support efforts by APRA, insurers and governments to increase understanding of the factors impacting insurance affordability.
And the final major cross-industry initiative that I will touch on this morning is APRA’s plan to review our prudential standards on governance and “fit and proper”. APRA will shortly release a discussion paper proposing changes to our core governance prudential standards across all APRA-regulated industries. It has been about a decade since APRA’s governance standards were last refreshed and community and market expectations have evolved. The review is designed to bring APRA requirements in line with contemporary practice and international standard setters. The proposals have been informed by our supervision and enforcement experience as well as international and domestic benchmarks. The key areas the review is targeting are skills and integrity, improving accountability for board performance and embedding better practice in line with global standards.
Before concluding, allow me to give a brief overview of some of our major industry-specific priorities for the next year.
In banking, we will continue acting on the lessons sparked by the collapse of Silicon Valley Bank in March last year. That includes conducting a broad review of our liquidity requirements for banks and reviewing feedback to our proposal to phase out AT1 as eligible bank capital before finalising our position. We will also be reviewing our licensing framework for banks to see if it continues to strike the right balance between encouraging greater competition and protecting financial stability.
In superannuation, we will step up our scrutiny of trustee expenditure using new granular expense data and will intensify supervision or consider enforcement action if we are unconvinced expenditure is in members’ best financial interests. We will support trustees prepare for the commencement of the Financial Accountability Regime next March, and finalise thematic work in relation to unlisted assets, liquidity stress preparedness and the internalisation of investments. We also remain focused on ensuring trustees are appropriately implementing their obligations under the retirement income covenant.
The work on retirement outcomes continues in insurance, where we will support life insurers to increase the availability of retirement products. APRA will continue to play a role in addressing the growing household insurance protection gap, alongside other stakeholders, including insurers, governments, communities, and peer regulators. This includes commencing an insurance data transformation project, which will broaden and deepen the information we collect and publish on insurance, further increasing understanding of what’s driving premium increases.
There is much more in our Corporate Plan, of course, and I urge anyone interested in understanding APRA’s agenda for the next year, as well as our longer-term strategic priorities, to find the document on our website.
In these uncertain times, we believe APRA’s strategic plan is the right one.
I will wrap up here but look forward to providing more information in answering your questions shortly.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.