Quarterly Statement by the Council of Financial Regulators – March 2024

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Wednesday, 6th March. The Council discussed a range of current and emerging vulnerabilities in the financial system, and actions the Council agencies were taking in response.

The Council noted that risks to the Australian financial system from lending to households warranted ongoing close attention but remain contained for the time being. Most households continue to be able to meet their debt servicing and other essential spending commitments, although many have had to make adjustments to their finances in a period of higher inflation and interest rates. However, hardship applications had risen materially over the past year. ASIC discussed with the Council its analysis on the experience of borrowers seeking financial hardship assistance from their lenders. There had also been an increase in the share of households who had fallen behind on loan payments (from historically low levels), and Council members expect some further increase in the period ahead. The Council noted that the risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected.

The Council discussed the role that sound lending standards had played in supporting financial system resilience. Preliminary insights from the recent annual Hypothetical Borrower Exercise, where banks provide APRA with serviceability assessments for different types of borrowers, were consistent with other data sources suggesting that bank lending standards had remained sound despite the competitive lending environment.

Council members discussed the challenging conditions in global and Australian commercial real estate (CRE) markets. Risks to the Australian financial system from domestic CRE lending were assessed to be contained due to banks' low exposures, conservative lending practices and the relatively strong financial positions of CRE owners. However, the Council noted that stress in overseas CRE markets could be transmitted to domestic markets through foreign ownership and common sources of funding, and required close monitoring as refinancing challenges in some overseas markets were likely to increase. Council agencies also discussed work underway to improve their visibility of foreign lending in CRE in Australia and the use of leverage by unlisted property trusts.

Risks to the financial system from cyber-attacks have continued to increase in scale and complexity as businesses increased their reliance on technology and third-party service providers. The Council discussed the importance of the regulatory initiatives and legislative work that is underway to improve preparedness and resilience in the financial system to these operational risks. The Cyber and Operational Resilience Working Group continues to work to strengthen agency coordination and enhance industry resilience through scenario exercises. The Council approved the expansion of the Cyber Operational Resilience Intelligence-led Exercises (CORIE) program, which had been important in raising cyber resilience testing capabilities and highlighting cyber resilience strengths and weaknesses across industry. The Council also discussed the fast pace of growth in the uses of artificial intelligence in the financial system and agreed to deepen its analysis of related risks.

Council members also discussed the challenges in the cash-in-transit industry and will continue to work with the Government and industry participants to ensure sustainable arrangements for cash distribution in Australia. The Council discussed the e-Conveyancing Payments Industry Code, which was recently developed by an AusPayNet-facilitated industry working group. The Code provides a self-regulatory framework to which participants involved in the financial aspects of e-conveyancing transactions (i.e. banks and e-conveyancing platform providers) will be bound and specifies various operational and technical requirements relating to the clearing and settlement of e-conveyancing transactions. The objective of the Code is to promote interoperability, security, trust and competition in the e-conveyancing industry. The Council called on banks and e-conveyancing platform providers to adopt the Code and for it to be activated within the next three months.

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.