Media Release Number: 2023-03 25 September 2023

Quarterly Statement by the Council of Financial Regulators – September 2023

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Wednesday, 20 September. The Council discussed a range of evolving global and domestic financial stability risks and received updates from the Council's working groups on cyber risks and resilience, crisis management arrangements and climate change.

The Council discussed the risks facing the global and domestic financial systems. There is increased uncertainty around the outlook for the Chinese economy due to stresses in the property sector interacting with longer-term financial vulnerabilities. Council members noted that a sharp slowdown in China, were it to materialise, would principally transmit to Australia through trade channels and through an increase in risk aversion in global financial markets. In advanced economies, the sharp increase in inflation and interest rates over the past couple of years has put pressure on household and business finances. It has also exposed some vulnerabilities in parts of the global financial system, requiring intervention by authorities.

Members noted that Australian households and businesses have been largely resilient to higher interest rates and cost-of-living pressures to date. The majority of borrowers, including those who had rolled off low fixed rates onto higher interest rates, have managed this transition by reducing discretionary spending and saving, drawing down on savings buffers or gaining additional work. The Council noted, however, that the effects of higher inflation and interest rates have been felt unevenly across households and businesses. They observed that the share of borrowers falling behind on mortgage payments has started to pick up but from a low level. In this respect they noted that the domestic economy is slowing and the outlook for employment remains the most important factor in households' resilience. The Council also heard that ASIC is focussing on how lenders are supporting customers experiencing financial hardship, having recently and publicly outlined its expectations of lenders in dealing with hardship applications. Despite these developments, the Australian banking system, supported by high levels of capital and liquidity, is well placed to manage a material deterioration in economic conditions.

The Council also discussed the current settings for macroprudential policies. The main considerations for macroprudential settings were discussed, including the risks arising from housing and business lending and the uncertainty around the economic outlook. The Council noted that APRA would regularly assess the appropriateness of macroprudential policy settings as economic and financial conditions evolve and continue to consult with CFR members.

The Council discussed the importance of resilience and preparedness for cyber security threats given the evolving threat environment. The Cyber and Operational Resilience Working Group provided an update on work underway to strengthen cooperation and communication between the CFR agencies on cyber security, as well as with other Government agencies and agencies in New Zealand. The Council also noted results from APRA's ongoing assessment of cyber resilience and preparedness of prudentially regulated entities, which highlighted areas where practices are falling short of expected standards. The Council welcomed APRA's intensified supervision of cyber security, including where entities' practices are found not to be meeting expectations set out in the Information Security Prudential Standard CPS234. ASIC also provided an update on its recent survey of ASIC-regulated entities' cyber resilience measures.

The Council also continued its discussion of the challenges faced by policy makers and regulators in responding to stress in the banking system in the aftermath of the issues earlier in the year in the United States and Switzerland. These international experiences highlighted the importance of preventative measures, including a regulatory and supervisory framework requiring the banking system to manage risk appropriately and maintain high levels of capital and liquidity, combined with strong inter-agency crisis management arrangements. The Council endorsed the ongoing work program of the CFR Crisis Management Working Group. It also agreed that it was important to ensure that Additional Tier 1 capital operated as intended and that deposit guarantee schemes supported ongoing customer access to funds.

The Council discussed the annual stocktake of climate and sustainability related initiatives undertaken by the agencies. The stocktake is available on the Council's website. Through the Climate Change Working Group, agencies are coordinating on a set of priorities to support financial market participants to manage the financial risks and identify the opportunities associated with responding to climate change. CFR agencies will focus on exploring the impact of climate change on the Australian economy and financial system, improving the transparency and consistency of sustainability-related information, contributing to the development of an Australian Sustainable Finance Taxonomy, and continuing Australia's international engagement on sustainable finance. These priorities align with the Government's forthcoming Sustainable Finance Strategy.

The Council discussed the results of the Reserve Bank's recent research project with the Digital Finance Cooperative Research Centre that explored potential use cases for a central bank digital currency (CBDC) in Australia. The project provided useful insights into how a CBDC could be used to enhance the functioning of the payments system, particularly in wholesale applications. It also highlighted a range of legal, policy, technical and operational issues that need to be explored as part of further research into the policy case for a CBDC. Members discussed some of the regulatory issues raised by the project, including those relating to how further enhanced regulatory sandbox arrangements could promote industry participation in innovation projects, could be carried forward.

Council of Financial Regulators

The Council of Financial Regulators (the Council) is the coordinating body for Australia's main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council's objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.