Wary APRA orders more stress-tests for banks

APRA will dramatically ramp up its stress-testing of the nation’s banks amid mounting outlook concern.

APRA chairman Wayne Byres. Picture: AAP

APRA will dramatically ramp up its stress-testing of the nation’s banks amid mounting concern inside the prudential regulator about the level of risk posed by a deteriorating domestic and global outlook.

It is understood the Australian Prudential Regulation Authority will switch to stress-testing on an annual basis from the current practice of once every three years. The last bank stress test was three years ago, so the next one will start before the end of the year and continue into 2020.

In its 2019-23 corporate plan, which was released yesterday and informed by six separate reviews and inquiries over the past 18 months, APRA also flagged a sweeping transformation of governance and culture in the $6 trillion financial system to help restore shattered community trust.

It will achieve this by undertaking intensive reviews and prudential inquiries to identify and require action in relation to poor practices, make greater use of regulatory technology to transform supervisory activity, and embed a “constructively tough” mindset in its officers.

Supervisors will be armed with market intelligence to identify governance outliers, with their skills sharpened by closer co-operation with other regulators.

APRA chairman Wayne Byres said the financial system was stable and broadly in good health but the status quo shouldn’t be taken for granted.

“As macroeconomic and geopolitical risks play out, as technological innovation transforms the industry, and as new risks such as cyber and climate change grow, we must have the right skills and resourcing to continue protecting bank depositors, insurance policyholders and superannuation,” Mr Byres said.

The corporate plan, he said, acknowledged the higher expectations of APRA, and fulfilled the regulator’s recent capability ­review as well as the recommendations of the Hayne royal ­commission. The move to allocate a considerable part of APRA’s additional $210 million in four-year funding to annual stress-testing of banks reflects the rising level of macroeconomic risk in the financial system.

The growing likelihood of a “no-deal” Brexit, near-zero interest rates, the US-China trade war, slowing domestic and global growth, declining house prices and subdued growth in wages are exercising minds at the highest levels of APRA.

Despite some factors, like Brexit, having little direct impact on Australia, the regulator is understood to be concerned that the old transmission mechanism of dislocation in bank wholesale funding markets could again rear its head, as it did in the 2008 financial crisis.

The major banks are now 60 per cent funded by more stable deposits and borrow from investors on extended terms to reduce their vulnerability to external shocks.

However, they still rely on more volatile offshore wholesale funding for about 20 per cent of their loan books.

APRA said its focus on the superannuation industry was improved performance, including the exit of underperforming funds.

Super funds, it said, needed to improve their efficiency in relation to fees and costs, as well as insurance and outsourcing, while maintaining high standards of governance and risk management.

Before the end of the year, APRA will publish “heat maps” that rate the performance of funds on a variety of measures, including performance, fees and viability.

The onus will be on the poor performers to explain why they’re at the bottom of the rankings.

The regulator will also conduct “deep dives” into trustee practices after the royal commission identified cases where trustees had not prioritised the interests of their members.

On general insurance, APRA said the industry had stable profitability and capital coverage.

Life insurance, on the other hand, was characterised by longstanding issues regarding legacy products and systems, and misselling products to consumers through direct marketing.