Media Release Number: 2022-04 27 September 2022

Quarterly Statement by the Council of Financial Regulators – September 2022

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Wednesday, 21 September. Items of discussion included the evolving risks to household and business balance sheets, the Reserve Bank's central bank digital currency (CBDC) pilot, leverage in the superannuation system and management of climate change financial risks. Subsequent to the meeting, members have been liaising in response to the Optus data breach.

The Council is closely monitoring the response of households and businesses to high inflation and rising interest rates. Pressure on household budgets has increased. At the same time, household balance sheets continue to be supported by strong conditions in the labour market, and many households accumulated larger saving buffers during the pandemic. Business insolvencies remain below equivalent pre-COVID levels, though some sectors are experiencing challenging trading conditions. The financial system remains well placed to support the economy, with loan arrears low and banks well capitalised. Notwithstanding the resilience of household and business balance sheets, the Council will continue to closely monitor trends in borrowing given the economic uncertainties, the high level of household debt, the decline in housing prices and rising interest rates.

The Council continues to focus on the evolution of the financial system and Australia's regulatory arrangements in response to new technologies. It discussed the Reserve Bank's collaboration with the Digital Finance Cooperative Research Centre (DFCRC) on a pilot project for a CBDC. The research will focus on use cases and business models that could be supported by the issuance of a CBDC. The Council has an open mind as to whether a public policy case will emerge to support the issuance of a digital form of the Australian dollar by the Reserve Bank. Members also discussed progress with the modernisation of payments system regulation in Australia.

The Council has completed a review of leverage and risk in the superannuation system, focused on limited recourse borrowing arrangements (LRBAs). The review has been conducted in conjunction with the Australian Taxation Office (ATO) following a request by the former Government. LRBAs allow a fund to borrow to purchase an asset, with the lender's rights limited to that asset if the loan defaults. The Council discussed the implications of the review's findings and will provide a report to the Government in the near future. A representative of the ATO attended for this discussion.

The Council discussed the annual stocktake of the climate-related initiatives of member agencies, compiled by the Council's Climate Working Group. A key focus has been APRA's Climate Vulnerability Assessment of the five largest banks, which is in its final stages. APRA intends to publish aggregate insights and lessons from the assessments later in 2022. ASIC continues to encourage Australian large and listed companies to improve standards of climate-related governance and disclosure. The Working Group will prioritise its work to facilitate high-quality comparable climate-related disclosures, in line with the Government's commitment to introduce disclosure requirements aligned with international standards. CFR agencies have also been engaging with the Australian Sustainable Finance Institute as it develops an industry-led Australian sustainable finance taxonomy. The Council supports these initiatives. The stocktake is available on the Council's website.

The Council endorsed the work program of its Crisis Management Working Group, which from 2022 incorporates annual inter-agency crisis exercises. It also discussed progress with cyber resilience initiatives, including the ongoing development of a cyber-attack protocol with New Zealand regulators and work on initiating further exercises under the Cyber Operational Resilience Intelligence-led Exercises (CORIE) testing framework.

Subsequent to the meeting, Council members, the Australian Competition and Consumer Commission and the ATO have been liaising closely in response to the recent Optus data breach. Council members are also working closely with financial institutions, reinforcing the importance of cyber security and the ‘know your customer’ requirements.

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.