APRA to probe spillover risks for super funds, insurers, banks

APRA will launch its first cross-industry stress test as it looks to probe spillover risks in the financial system.

APRA chair John Lonsdale. Picture: Chris Pavlich

The prudential regulator will launch its first cross-industry stress test as it looks to probe spillover risks in the financial system, with banks, superannuation funds and insurers all on notice.

Speaking at a business summit on Tuesday, Australian Prudential Regulation Authority chair John Lonsdale said the regulator was currently considering the design of the stress test, which it expected to launch in 2025. The test itself would take a year to complete, he said.

“The intention behind the new test is to sharpen APRA’s response to systemic risks by deepening our understanding of the transmission mechanisms of shocks across the financial system,” he said.

“We hope to gain insight into the impacts of spillover and amplification risks between industries and identify possible blind spots in our supervisory regime. Learnings from the process would also inform our future stress testing program, including similar future exploratory and industry-specific exercises.”

Pointing to commercial property and climate change, Mr Lonsdale said both had the potential to deliver spillover risks into other industries.

“Should we see a major correction in commercial property valuations, all three industries – banking, super and insurance – would be impacted,” he said.

“Climate risk is another interrelated area. The declining affordability and accessibility of property insurance in many parts of Australia, for example, isn’t only bad news for those communities.

“It also impacts the ability of households and businesses to get credit, to rebuild after a disaster or to repay loans, and might also impact super though requests for early releases on compassionate grounds.”

Failures and risks in other industries, including telecommunications, could also feed through to the financial system, he said.

The ballooning superannuation sector, meanwhile, would, in time, exceed the banking sector in terms of asset size, Mr Lonsdale said.

“The banking industry remains the cornerstone of Australia’s financial system, but that status is increasingly being challenged by superannuation,” he said.

“Over the past decade, the value of assets managed by the superannuation sector has grown at almost double the rate of banking – 8.8 per cent a year compared to 4.8 per cent.”

The regulator is working on the design of the new system-wide stress test and how it might be introduced. It has been consulting with the Bank of England in recent months, as the UK central bank is embarking on a similar strategy and is further along in its rollout of a system-wide stress test

“Our expectation is a test would involve a selected number of large entities and it’d be conducted in stages with a year for design and a year for the exercise itself (in 2025),” Mr Lonsdale said.

On entities operating at the regulatory perimeter, the APRA chair said it was a matter for government to decide whether these should come under the prudential umbrella.

“The Treasurer has announced some reforms on the payment side and we’re involved in that with other council members,” Mr Lonsdale said.

“On stored value facilities, that’s an important reform to APRA and very much fits our mandate on what is not quite a deposit, but it looks and feels like a deposit. So, you know, how should we regulate that?”

APRA’s plans for a more in-depth probe into the financial system and comments on potentially capturing more of the payments industry come as federal Opposition treasury spokesman Angus Taylor raised concerns about attempts to impose further regulation in the financial sector, noting he had already seen “regulatory overreach”.

The recent announcement of a “regulatory grid” was a positive development for the banking sector, Mr Taylor told the summit.

The government announced in recent weeks it would bring in the grid, modelled on the UK’s system for regulating the financial sector, bringing together Australia’s financial regulators Australian Securities and Investments Commission, Australian Competition and Consumer Commission, Australian Prudential Regulation Authority, RBA and the Australian Taxation Office.

Mr Taylor said the Coalition would seek to extend the regulatory grid to other sectors, including energy and telecommunications, noting it was important to force regulators to acknowledge the regulatory burden of their changes.

He also warned federal Treasurer Jim Chalmers to not “stack the board” at the RBA, signalling the Coalition may look to frustrate the government’s attempts to reform the central bank board.

Mr Taylor said the RBA needed “evolution not revolution”, noting the Treasurer was already not following due process after appointing two new members to the RBA’s board.

Former union officials Elana Rubin and Iain Ross were appointed to the RBA board by the Treasurer in April last year.

“Certainly we need to improve the operation of the Reserve Bank, but what we don’t need is a revolution,” he said.

Mr Taylor said all current members of the RBA’s board should be carried over to the new governance board.