Here's why Aussies should trust the country's financial system
In a speech delivered to the AFR Banking Summit in Sydney, APRA Chair John Lonsdale (pictured above) stressed the importance of confidence in maintaining a strong and resilient banking system that is well-prepared to respond to tough financial conditions.
Lonsdale made the statement following the rapid collapse of Silicon Valley Bank and the subsequent takeover of Credit Suisse that sparked global alarm about contagion risk and which demonstrated what happens when customers lose confidence in their banks.
“The trust Australians feel in their banks’ ability to withstand a crisis is the product of many years of regulatory reform designed to reinforce the system’s financial and operational resilience,” he said. “This has enabled us to build a regulatory system for banking that has different and often tougher standards and requirements than many peer jurisdictions. We might be connected, but their issues and problems are not necessarily ours.”
Lonsdale said APRA’s prudential framework for banks exceeds international standards, particularly in the area of interest rate risk in the banking book (IRRBB).
“We are the only jurisdiction in the world that mandates banks carry capital to address the risk of rising interest rates as part of their core (pillar one) capital requirements,” he said. “The significance of this measure in light of current events is hard to overstate. SVB’s exposure to rising interest rates was one of the main factors behind its collapse. In contrast, as markets moved in response to RBA changes in the official cash rate, Australian banks have had to hold additional capital.”
The APRA leader was confident that the Australia banking system is among the best equipped in the world to handle a crisis. But no matter how resilient the country’s financial system is, or how limited the impact of recent events in the US and Europe, he said, there are still lessons to learn.
“One aspect of recent events was the sheer speed of developments, especially with SVB,” Lonsdale said. “Chiefly, this is a consequence of technological innovation... With the ubiquity of modern online banking, there’s no need to queue and no need to be constrained by branch opening hours. Entire balances can be instantly transferred elsewhere at the click of a button 24 hours a day. Information – and misinformation – also spread further and faster than ever before, particularly through social media.”
With the speed of crises accelerating, he said APRA needs to be ready to act quickly as well as have greater confidence than ever in its prudential safeguards.
APRA is also working to effectively identify and manage all operational risks, with a focus on cyber.
“Given recent cyber breaches affecting a broad number of Australians, boosting cyber resilience remains one of APRA’s top priorities,” Lonsdale said. “Yet our analysis of the first tranche of results from the reviews show that entities have more work to do and that there is a need to continuously raise the bar on cyber preparedness and resilience across banking, insurance and superannuation.”
Some areas APRA may need to improve on include:
- a lack of rigour in the nature and frequency of security control testing
- insufficient board oversight on cyber
- incident response plans not regularly reviewed or tested
- insufficient safeguards to protect sensitive customer data
- inadequate service provider oversight arrangements.
In an increasingly interconnected global economy where the Australian banking system will always be exposed to forces beyond our control, Lonsdale said Australians can be confident that “their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements” and that APRA “will continue to work hard before any crisis and take decisive action to continue protecting bank depositors, insurance policyholders, and superannuation members.”
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