APRA chair pings contingency plans needed

Speaking at a FINSIA financial services event, Wayne Byres said while the Australian banking system remains resilient post-pandemic, the prudential watchdog will be putting “a lot more effort” into recovery planning in the financial system.

Referring to the major shifts facing the industry, such as the digital disruption and the emergency of higher inflation and rising interest rates, Mr Byres said he wouldn’t “lose sleep” over it. 

“Whether it’s interest rates, or housing prices, or insurance, affordability, improvements to the superannuation system, they’re all trends… and people have time to respond to them and adjust to them,” Mr Byres said.

“No one should be sort of particularly caught off guard by those sorts of things.” 

Unexpected events, such as cyber attacks, natural disasters, escalation of geopolitical events and the pandemic are the “sorts of things” that have the potential to catch people off guard and the areas where “contingency plans” are needed. 

“Being ready with good contingency plans, a menu of options that you can deploy as needed, is sort of how we approach them,” he said.

“To make sure that whatever the adversity comes from, we don’t know when we don’t know where we’re not quite sure where it will hit. But we know something will go wrong at some point.”

Close eye on mortgages 

Despite the emphasis placed on the “well-capitalised” and “well-funded” Australian banking system, it was noted that inflation and rising interest rates will have an impact on many businesses and households.

“When it comes to inflation and interest rates, I’ll simply note that many businesses and households haven’t experienced an inflationary period, and a generation of borrowers haven’t experienced material increases in rates,” Mr Byres said.

“Not everyone will be prepared or know how to navigate it. Banks’ credit risk capabilities will be tested. 

“Unsurprisingly, we’ll continue to pay special attention to residential mortgage portfolios and housing lending standards given their importance to system stability.”

With growing housing affordability concerns, he said there would inevitably be “pockets of stress” if rates rise quickly and housing prices fall. 

Prudential frameworks need ‘overhaul’

Mr Byres flagged foundational changes to the prudential regulation system, in what he said will “modernise the prudential architecture”.

“As financial system risks have evolved, the prudential framework has grown. In total, we now have around 150 prudential standards and practice guides, supported by a myriad of information papers, industry letters and FAQs. It could do with an overhaul,” Mr Byres said.

“We’ve therefore kicked off a project to do just that. Our objectives are to make the framework more cohesive; easier to understand and navigate; and less costly to maintain and update. In doing so, we also want to cater to new risks from digitisation.”

[Related: APRA to outline crypto expectations to banks]