Quarterly Statement by the Council of Financial Regulators – December 2023

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Friday, 8 December.

The Council discussed a range of current and emerging vulnerabilities in the financial system that have the potential to lead to financial instability, and what actions the Council agencies were taking to mitigate these vulnerabilities. A number of the identified vulnerabilities were associated with the resilience and preparedness in parts of the financial system to threats such as cyber-attacks, geopolitical tensions or climate change. Related work programs were underway across Council working groups to improve the financial system's resilience to such threats, and Council members agreed that working with industry would be a critical part of these workstreams.

The high level of household leverage was also identified as having the potential to pose risks to the financial system and economy. Budget pressures were being widely felt across households due to high inflation and increased interest rates, and the share of borrowers falling behind on mortgage payments had risen. However, the uptick in loan arrears was occurring from very low levels. ASIC also updated the Council on its, now well underway, assessment of the financial hardship practices of lenders including the ongoing collection of data. In discussing emerging vulnerabilities, members also agreed that Council agencies would examine the potential financial stability risks from the continued adoption of artificial intelligence in financial services.

The Council noted progress by domestic and international regulators to further strengthen the banking system following the turmoil in parts of the global banking system earlier in 2023. The Council endorsed APRA's plans to formally consult in 2024 on any potential changes to prudential standards to improve the effectiveness of Additional Tier 1 (AT1) capital instruments. AT1 instruments are hybrid bonds designed to absorb losses at a bank in stress and, if needed, support resolution in the event of failure.

The Council discussed its future work program aimed at enhancing the resilience of the Australian financial system in the context of a more complex and challenging geopolitical environment. Members noted that fragmentation in the global economy and global financial system, as a result of geopolitical tensions, could give rise to financial stability risks in Australia and abroad. In this context, members agreed that it was prudent for financial institutions to consider geopolitical risk as part of their wider risk-management framework. CFR agencies planned to increase engagement with industry in the period ahead.

Risks from non-bank financial intermediation (NBFI) were also assessed. Mortgage lending by non-banks had slowed sharply over the past year, reflecting more challenging funding conditions and competitive pressures in the mortgage market. Non-bank mortgage arrears had picked up but remained low by historical standards. Council agencies would monitor non-bank lending standards closely as the composition of lending had shifted towards non-prime mortgages and some forms of riskier business lending. Given the central role that the NBFI sector had played in recent global episodes of market volatility, the Council also reviewed some of the NBFI sector's other activities including investment in commercial real estate and the use of over-the-counter derivatives. It was agreed that Council agencies would continue to monitor several potential vulnerabilities and address some information gaps.

The Council discussed progress on the Government's reform of the regulatory architecture for Australia's payments system. The proposed changes to the Payment Systems (Regulation) Act 1998, would modernise the regulatory regime and broaden its reach to capture the wide range of entities in the payments value chain. The Government was also consulting on a licensing framework for payment service providers to facilitate competition in payment services. Council members noted the importance of Council agencies working together in this area, particularly on the framework for industry standard-setting. Council members also discussed the challenges in the cash-in-transit industry, and will continue to work with the Government and industry participants to put in place sustainable arrangements for cash distribution in Australia.

The Council welcomed the recent release of the Government's Sustainable Finance Strategy Consultation Paper. Members also agreed to the Treasurer's request to provide recommendations to address key sustainability-related data challenges faced by financial system participants, with an agreed first step for the Council's climate working group to report back on the scope required to do this.

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.