Quarterly Statement by the Council of Financial Regulators – March 2023

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Friday, 10 March. The committee discussed the impact of high inflation and rising interest rates on Australian households and the financial system, steps to strengthen the resilience of the financial sector to cyber risks, and regulatory developments in financial market infrastructure and the payments system.

The Council continues to closely monitor the resilience of Australian households to high inflation and rising interest rates. Strong labour market conditions and high levels of accumulated savings are supporting household finances, while lending standards have remained prudent. At the same time, mortgage payments have increased substantially. The Council recognised that there is significant variation in experience across borrowers, with a small share of households with high levels of debt relative to their income and low savings and equity buffers experiencing debt-servicing challenges. In the period ahead, a large share of fixed-rate borrowers will experience a significant increase to their loan repayments as their loans reset at higher interest rates. Many of these households have accumulated material savings buffers ahead of this transition, but some are better prepared than others to withstand higher borrowing costs. The Council will continue its close monitoring of housing market developments, including lenders' approaches to supporting customers experiencing hardship or other changes in financial circumstances.

Higher interest rates and a slowing economy were expected to result in an increase in non-performing housing and business loans over the period ahead, but from very low levels. External refinancing activity for home loans had been very strong at an aggregate level, reflecting strong competition among lenders. Council members noted the risks around the economic outlook and agreed to continue monitoring credit growth, asset price developments, lending standards and system-wide resilience more generally. APRA's ‘unquestionably strong‘ capital requirements, combined with Liquidity Coverage Ratio and Net Stable Funding Ratio requirements to reinforce liquidity and funding resilience, mean the Australian banking system is well-positioned to adjust to evolving economic conditions and other external shocks.

The Council discussed the importance of cyber security and operational resilience in the financial system, including the program of work underway, and the joint initiatives that it is working cooperatively on with other agencies. The scope of work of the Council's Cyber Security Working Group has been widened to include broader operational resilience principles. The Council noted initiatives by APRA and ASIC, respectively, to further assess cyber resilience and preparedness across regulated entities.

The Council discussed progress in the work the Government is undertaking to modernise financial regulation in Australia. This includes implementing the Financial Market Infrastructure regulatory reforms, consultation on the development of a strategic plan for the payments system, a new licensing framework for payments service providers, crypto asset regulation, storage arrangements for digital assets and modernising the Payment Systems (Regulation) Act 1998.

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Subsequent to the CFR meeting on 10 March, CFR members met to discuss the resolution action announced by United States authorities in relation to Silicon Valley Bank. APRA, in consultation with CFR agencies, will continue to closely monitor the situation through its intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid.

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.