Quarterly Statement by the Council of Financial Regulators – March 2022

The Council of Financial Regulators (the Council) held its quarterly meeting on Friday, 25 March. Key items of discussion included financial stability risks arising from the sanctions imposed as a result of Russia's invasion of Ukraine, housing market risks, the modernisation of payments system regulation, possible responses to de-banking and cyber security. Representatives of the Australian Competition and Consumer Commission (ACCC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) attended for part of the meeting.

The Council discussed the financial stability implications of Russia's invasion of Ukraine and the sanctions on Russia and Belarus. While Australia's financial institutions have very little direct exposure to Russian entities, the evolving situation has increased risks to the global economy and financial systems in some countries. The Council emphasised the importance of financial institutions in Australia fully complying with the sanctions against Russia and Belarus.

The Council has also continued to monitor the ongoing effect of the COVID-19 pandemic on the financial system. The Omicron variant has had a less sustained impact than previous variants, and household and business balance sheets remain strong. The economy has been resilient and the financial system is well placed to provide the necessary financing for households and businesses.

The Council discussed housing credit and housing market conditions. Housing credit grew strongly through 2021 and loan commitments suggest this will continue to be the case in the months ahead. Housing price growth has, however, eased in some locations. APRA's decision in October to increase banks' minimum serviceability buffer for housing lending reduced the maximum borrowing capacity of some borrowers and has helped strengthen new borrowers' resilience to future shocks. A particular focus of the discussion was the increased share of loans with a high debt-to-income (DTI) ratio. Members discussed the actions being taken by banks to manage the risks within their portfolios, and will continue to assess the need for further macroprudential measures. It is important that lending standards are maintained and that borrowers have adequate buffers, especially in an environment in which housing loan interest rates are at historically low levels and are expected to rise over time in line with the economic recovery.

The Council discussed possible approaches to the regulation of stablecoins – a type of crypto-asset that aims to maintain a stable value against one or more currencies or assets. The particular focus was payment stablecoins – those stablecoins with features that can make them attractive as a means of payment and store of value. These stablecoin arrangements bear similarities with stored-value facilities (SVFs) and the Council will now work on options for incorporating them into the proposed regulatory framework for SVFs. The SVF framework was published by the Council in November 2020 and is being implemented as part of the Government's reforms to the payments licensing framework announced in December.

The Council also discussed the Government's initiatives to modernise other elements of the regulatory framework. The Government released a consultation paper on regulation of crypto asset secondary service providers on 21 March, proposing a licensing regime for a range of services, including digital currency exchanges and custody services. The Council is supporting this work, in conjunction with the ACCC, the Australian Taxation Office, AUSTRAC and the Department of Home Affairs.

The Council considered various policy options for addressing the issue of de-banking – where a bank declines to offer or withdraws banking services for specific customers or classes of business. Following a request from the Treasurer, a working group – consisting of the Council agencies, the ACCC, AUSTRAC and the Department of Home Affairs – is preparing options by June 2022 for the Government to consider.

Members discussed the outcomes of a pilot exercise under the new threat intelligence based cyber testing framework (CORIE) – designed by the Council's Cyber Security Working Group and completed in October 2021. The program involved ‘red team’ assessments of the cyber defences of a number of Australian financial institutions. The pilot provided valuable information, both for the participating institutions and for the Council agencies. The Council agreed to a broader roll-out of the CORIE testing program.

Finally, the Council endorsed a program of cross-agency crisis exercises to test resolution arrangements for APRA-regulated entities. Crisis exercises are designed to test crisis management arrangements and assist decision makers to familiarise themselves with some of the difficult policy choices during a resolution.

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.