Quarterly Statement by the Council of Financial Regulators – June 2023

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Thursday, 8 June. The main topics discussed were the lessons for Australian regulators following recent stresses in parts of the international banking system, the impact of high inflation and interest rates on households, businesses and the financial system, and the RBA Review recommendations regarding the Council.

The Council discussed the new complexities and challenges faced by policy makers in responding to bank stress, as highlighted during the recent bank crisis events in the United States and Switzerland. The high level of resilience of the Australian banking system partly reflected the strength of APRA's prudential framework. However, the Council also recognised that recent events abroad provided an opportunity to further consider crisis preparedness and management arrangements in Australia given the speed of impact observed in recent international bank crisis events.

Council members have been closely engaged with their international counterparts to understand developments and share learnings. International experience has highlighted the importance of crisis management tools, including Additional Tier 1 capital operating as intended and guarantee schemes being able to provide depositors timely access to funds. The Council is assessing Australia's crisis management settings to ensure they remain robust in light of international developments. Communication and coordination arrangements across the Council agencies have also been reviewed and updated.

The Council continues to closely monitor the resilience of Australian households to higher interest rates and cost-of-living pressures. Most households are well placed to manage the impact on budgets due to strong labour market conditions and sizeable saving buffers. This includes fixed-rate borrowers, who have, to date, generally managed the transition to higher interest rates at the end of their fixed term. However, some households are experiencing significant pressure on their finances, including those on lower incomes (including many renters) and those with low savings buffers and high levels of debt relative to their income. As economic conditions have become more challenging, the share of housing and business loans in arrears has increased a little, albeit from very low levels. The Council will continue to closely monitor lenders' approaches to supporting customers experiencing financial hardship or other changes in financial circumstances.

External refinancing activity for home loans had remained at very high levels, reflecting strong competition among lenders. The Council recognised that some borrowers were facing challenges in refinancing their existing loan with another lender because of a range of difficulties, including in meeting the serviceability criteria that lenders use. APRA's prudential framework does not prohibit banks from lending to these borrowers, although APRA expects that banks will set prudent limits for their exceptions to lending policy and monitor such lending closely. Council members supported APRA's assessment that the serviceability buffer – currently set at 3 per cent – remains at the appropriate level given the current environment, including the high degree of uncertainty and risks to the economic outlook. The Council noted that APRA would continue to assess the appropriateness of macroprudential policy settings as economic and financial conditions evolve.

The Council welcomed the finding from the Review of the Reserve Bank that the cooperation among the Council agencies had been effective in mitigating financial stability risks. The Council discussed the Review recommendations to provide more clarity and transparency on how the Council agencies work together to promote financial stability. Members agreed that agencies would update their existing Memorandums of Understandings and the Council Charter. This will include close coordination with the work underway by APRA and the Reserve Bank in response to the Review involving interactions between monetary policy, financial stability and macroprudential policy.

The Council also welcomed the Federal Government's release of its inaugural strategic plan for payments, and the related consultations on modernising the Payments System Regulation Act 1998 and defining payment functions that require a payments licence. They discussed the program of work ahead on key payments reforms, including the role of Council agencies in setting standards for and supervising payment service providers that seek direct access to payment systems.

The Council also held its annual meeting with other agencies, including the Australian Competition and Consumer Commission (ACCC), the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Taxation Office (ATO). The main issues discussed included the government's recent reforms and regulatory developments aimed at tackling scams and money laundering activities in Australia. The ATO also reported to the Council that it is gradually normalising its debt recovery activities, following an earlier period of forbearance during the pandemic.

AUSTRAC updated the Council on the government's proposed reform to the Anti-Money Laundering and Counter Terrorism Financing (AML/CTF) regime. The Council discussed the importance of an effective AML/CTF regime that helps Australian businesses and financial markets combat money laundering, terrorism financing and other serious financial crimes. The Council will continue to work with AUSTRAC and the Attorney General's Department to support the modernisation of the AML/CTF regime to ensure the regime remains fit for purpose and complies with international standards.

The Council discussed the increasing volume and sophistication of financial scams targeting Australians, especially investor-related scams. The Council welcomed the government's decision to establish the National Anti-Scam Centre to improve Australia's ability to detect, disrupt and deter scams and online frauds. Council members noted the importance of strengthening cooperation between government and industry and addressing potential regulatory gaps to respond to increasingly sophisticated scam activity.

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.