Regulators identify high debt, geopolitics and AI as system vulnerabilities
Australia’s financial system is at risk from geopolitical tensions, high household debt and the increasing adoption of artificial intelligence, the Council of Financial Regulators says.
Top financial regulators have highlighted growing “vulnerabilities” in the Australian financial system, including risks stemming from rising geopolitical tensions, high household debt levels, and the increasing adoption of artificial intelligence.
In a statement following its quarterly meeting last week, the Council of Financial Regulators on Wednesday said its discussion focused on “a range of current and emerging vulnerabilities in the financial system that have the potential to lead to financial instability.”
Ongoing oversight of work to mitigate threats posed by cyber-attacks and climate change risks remained important areas of focus for the council, which is chaired by RBA governor Michele Bullock and also includes officials from APRA, ASIC and Treasury.
But household indebtedness and risks in the so-called shadow banking sector – made up of lenders that are subject to lax regulation and less supervision than banks – as well as potential threats from AI were emerging as potential vulnerabilities.
“Budget pressures were being widely felt across households due to high inflation and increased interest rates, and the share of borrowers falling behind on mortgage payments had risen,” the statement said.
Those worries are assuaged to an extent because loan arrears are increasing from very low levels. However, the “high level of household leverage was also identified as having the potential to pose risks to the financial system and economy”.
Those concerns follow comments from Ms Bullock, who last week stressed the cost-of-living crisis was putting close to one in 50 home borrowers in “severe financial stress”.
About 5 per cent of borrowers are finding their income insufficient to cover their mortgage payments and essential expenses amid high inflation and 13 cash rate increases by the RBA since May last year that have lifted the cash rate to 4.35 per cent.
The comments also come as the Albanese government’s mid-year economic and fiscal outlook documents on Wednesday revealed Treasury expects economic growth to slow sharply this financial year.
The MYEFO papers revealed the government expects the RBA ti cut interest rates in the back half of next year, which would help drive a rebound in economic growth in the 2024-25 year as consumption recovers.
The forecasts include unemployment rising to a peak rate of 4.5 per cent next year, up from 3.7 per cent currently and higher than the RBA’s peak forecast of 4.25 per cent.
Amid the escalating conflict in the Gaza Strip, geopolitical tensions also featured highly in the CFR’s last quarterly meeting, with regulators agreeing more needed to be done by banks, insurers, superannuation funds and other financial institutions to prepare for potential impacts.
“Members agreed that it was prudent for financial institutions to consider geopolitical risk as part of their wider risk-management framework,” the CFR said, adding that its members planned to increase engagement with industry in coming months.
“Fragmentation in the global economy and global financial system, as a result of geopolitical tensions, could give rise to financial stability risks in Australia and abroad.”
APRA has taken steps to improve resilience in the banking sector to prevent failures such as those seen in the US this year, including tightening interest rate risk controls, as well as liquidity and capital standards.
It is also planning changes to the rules around additional tier 1 capital – commonly known as hybrids – which account for about 2 per cent of the big four’s capital bases, as they could create challenges in a crisis.
Regulators also warned of accumulating risks in the non-banking sector, highlighting rising arrears levels – though still from a relatively low base – and a shift in lending towards non-prime mortgages and other riskier categories.
Regulators said they would keep an eye on unregulated financiers and monitor their lending standards, as well as “several potential vulnerabilities”.
“Members also agreed that council agencies would examine the potential financial stability risks from the continued adoption of artificial intelligence in financial services,” they said.
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