"There is still financial stress in systems, though," chairman says
The Australian banking sector is navigating a period of significant interest rate increases, presenting both challenges and opportunities. Despite an uptick in financial hardship within the community and modest increases in overdue payments, the sector's capital levels remain robust, according to the prudential regulator.
The Australian Prudential Regulation Authority (APRA) has directed banks to prepare for their annual stress test, following the successful passage of the test in the previous year, according to a report by The Australian. The stress test, which assesses resilience and adherence to minimum capital and liquidity requirements under severe economic conditions, is expected to be less arduous in 2024 due to the likelihood of an economic soft landing.
“We think [the banks’] capital levels, liquidity levels, credit standards, [and] prudentially are very strong,” Australian Prudential Regulation Authority chairman John Lonsdale (pictured above) told The Australian. “There is still financial stress in systems, though. I sit on national debt helpline calls. I listen to two people talk about financial stress, and there is certainly financial stress in the community.
“But it is not translating into the mortgage book,” Lonsdale said. “What we’ve seen in a nutshell, is borrowers have been able to handle that very well.”
In the context of a cooling inflationary environment and the potential for a rate cut in the first half of the year, banks are positioned to benefit from lower funding costs, higher credit growth, and potentially lower bad debts than anticipated, The Australian reported. However, Lonsdale underscored the importance of maintaining strong prudential supervision and regulation, particularly in light of escalating geopolitical risks, natural disasters, and the growing threat of cyber attacks.
“The war in Ukraine is ongoing, but now we also have a conflict in the Middle East and threats to the safety of shipping which is already affecting transport costs and prices for goods,” Lonsdale said. “All of that underscores the need to have a strong, stable financial system with good capital liquidity credit standards, which we have. We need to make sure that where lessons can be learned, we see gaps, we do that.”
Read next: APRA releases quarterly deposit-taking institution statistics for September
APRA's six-month plan outlines key priorities, including cyber resilience, lessons learned from the previous year's banking crisis, and enhancements in the valuation of unlisted assets and retirement outcomes for superannuation fund members. The regulator is also consulting on revisions to strengthen liquidity and capital adequacy standards, with a focus on interest rate risk in the banking book, according to The Australian.
Furthermore, APRA is considering changes to Additional Tier 1 bonds, commonly known as hybrid instruments, to address potential challenges in a banking crisis.
The regulator is also emphasising the need for entities to meet standards on cyber resilience and climate risk self-assessment, while releasing transitional rules to facilitate the transition from the existing Banking Executive Accountability Regime to the Financial Accountability Regime.
Have something to say about this story? Let us know in the comments below.
