Council of Financial Regulators monitoring SVB fallout

The Council of Financial Regulators is keeping a close eye on the fallout from the demise of Silicon Valley Bank against a backdrop of high inflation and rising interest rates.

The peak body of Australian financial regulators has rushed to reconvene just days after their quarterly meeting following the demise of Silicon Valley Bank. Picture: James Brickwood/Getty Images

The peak body of Australian financial regulators has urgently reconvened to discuss the impact of the collapse of Silicon Valley Bank, just days after their regular quarterly meeting.

In a statement posted on its website on Wednesday, the Council of Financial Regulators said it met to discuss the impact of high inflation and interest rates, before returning to discuss the regulatory response to SVB.

The CFR, which is composed of representatives of the Reserve Bank, the Australian Prudential Regulation Authority, Treasury, and the Australian Securities & Investments Commission, said it was closely watching the impact of rising rates and inflation on Australian households.

The regulatory council warned it expected to see an increase in loan arrears across business and housing, but noted this would lift from “very low levels”.

The council said it was monitoring the resilience of households to the economic environment amid concerns of stress as rates face 10 back to back rises.

This has seen the RBA lift rates 10 times since April 2022 from 0.1 per cent to 3.35 per cent.

The CFR said the high levels of accumulated savings and strong labour market conditions were supporting household finances.

The regulatory council said it was not concerned about lending standards, noting they remained prudent.

This comes as APRA announced it would hold the threshold at which lenders assessed borrowers for loans at 3 per cent above the product rate.

However, the CFR noted “at the same time, mortgage payments have increased substantially”, warning there were concerns about “a large share of fixed-rate borrowers” who were set to face significantly higher mortgages as they move on to higher variable rate products.

“The Council recognised that there is significant variation in experience across borrowers, with a small share of households with high levels of debt relative to their income and low savings and equity buffers experiencing debt-servicing challenges,” the CFR said,

“Many of these households have accumulated material savings buffers ahead of this transition, but some are better prepared than others to withstand higher borrowing costs. “

The CFR said its members were aware of the risks around the economic outlook and all agreed to monitor credit growth and asset price developments, as well as lending standards and system-wide resilience.

“APRA’s ‘unquestionably strong‘ capital requirements, combined with Liquidity Coverage Ratio and Net Stable Funding Ratio requirements to reinforce liquidity and funding resilience, mean the Australian banking system is well-positioned to adjust to evolving economic conditions and other external shocks,” the CFR said.

The council said its members discussed measures from within the financial system to improve cyber resilience and security.

This has seen the CFR broaden the scope of work of its cybersecurity working group to include “broader operational resilience principles”.

The CFR, which first met on March 10, said it reconvened subsequent to its initial meeting to discuss the crisis at SVB after US regulators moved to take over the bank and backstop depositors.

The Federal Deposit Insurance announced on Monday it would transfer all deposits from SVB to a “bridge bank” operated by the regulator in a bid to protect the assets.

This comes after the California Department of Financial Protection and Innovation closed SVB on Friday and appointed the FDIC to control the failed bank.

The CFR said APRA, in consultation with ASIC, the RBA, and Treasury, would continue to monitor the collapse of SVP “through its intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid”.