Australia banking regulator warns on elevated risks from abroad

[SYDNEY] Risks to Australia’s financial system from overseas are heightened and current geopolitical volatility will remain for some time, according to the nation’s banking regulator.

While the country is well-placed to absorb potential shocks, the resilience could be eroded if institutions are not prepared for a wide range of scenarios, a report from the Australian Prudential Regulation Authority (APRA) showed on Thursday (Nov 20). APRA and other regulatory agencies are attempting to strengthen the system with further work dedicated to geopolitical risk, it said.

APRA is also closely monitoring any build-up of domestic vulnerabilities, particularly in the housing market, including high household debt. Overall, housing lending standards remain sound, though APRA noted some signs of a pick-up in higher risk lending, particularly high debt-to-income borrowing by investors.

The new “System Risk Outlook” report will be published twice a year in a bid to lift transparency around what APRA is observing domestically and internationally.

The insights “confirm that Australia’s financial system is stable, resilient and well-placed to absorb shocks, but they also emphasise why we can’t be complacent”, APRA chair John Lonsdale said. “International political and economic uncertainty remains elevated, which is why APRA is stepping up its focus on geopolitical risk.”

The report also included a summary of the findings from the initial part of APRA’s inaugural system risk stress test, done this year with the country’s four major banks and six large superannuation funds. Structural features of super funds, as the domestic pension funds are known, mean that the industry acts as an important stabiliser for the system during periods of stress, however can in some cases amplify the negative impact of the shock on members and the system, it found.

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APRA said that while financial institutions are attuned to the volatile geopolitical climate, it sees a large variety in the level of maturity of geopolitical risk management. There remains a significant opportunity across all entities to strengthen such practices, it said. BLOOMBERG