Quarterly Statement by the Council of Financial Regulators – December 2024

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Monday, 2 December.

The Council is the main coordinating body for Australia’s financial regulators, bringing together the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA).

Systemic risks and vulnerabilities

The Council discussed a range of current and emerging risks and vulnerabilities that could lead to, or amplify, financial instability in Australia. The discussion also covered longer-run structural trends for the Australian financial system relating to digitalisation, the environment and the evolving international security landscape.

In this context, the Council noted that there would be a range of systemic risks and vulnerabilities in focus for the year ahead, including in particular:

• Geopolitical risks. Heightened geopolitical tensions are already leading to economic and financial fragmentation, and a further deterioration in the international security environment remained a risk for the global economy and financial system;
• Operational vulnerabilities. These included the challenges associated with cyber threats and managing dependencies on third-party service providers. The increasing digitalisation of financial services and the nature of operational connections across the financial system were likely to make these vulnerabilities more challenging to manage over time;
• Liquidity risk. The Council noted the potential for liquidity shocks to be amplified through the financial system. The potential for rapid deposit runs had been highlighted by international events in 2023. It was also noted that there are increasing interconnections between the banking and superannuation sectors, which can increase contagion risk;
• High household leverage. Consistent with their long-standing focus on household debt in Australia, CFR agencies continue to closely monitor and assess developments in this area;
• Climate change. Understanding, measuring and preparing for the effects of both the physical and transition risks of climate change is a key priority for the financial system, in line with the Government’s sustainable finance strategy.

The Council noted that in each of these priority areas, CFR agencies are taking forward a number of initiatives to monitor the risks and continue to strengthen the resilience of the financial system. The Council also noted the importance of a coordinated approach across CFR agencies in these areas, which form the core of the Council’s work program for the year ahead.

Geopolitical risk

The Council noted that geopolitical risk is increasingly cited as a principal concern for regulators and industry internationally, and is likely to fundamentally characterise global affairs for some time. Heightened international tensions create the potential for adverse effects on the economy and financial system, including from cyber threats and conflicts.

In this context, the Council agreed to a work program that would support member agencies and industry to strengthen the resilience of the financial system. The Council also noted that there are a number of related initiatives already in train to reinforce financial system resilience, including the implementation of APRA’s operational risk standard and new crisis management powers for financial market infrastructures (FMIs).

Crisis preparedness

The Council discussed the recent crisis simulation exercise undertaken by Australian and New Zealand agencies through the Trans-Tasman Council on Banking Supervision (TTBC) in September 2024.^[1] The simulation sought to ensure that TTBC agencies are better prepared to manage a bank failure, and yielded several lessons. The Council noted the importance of continuing to fire-drill for crisis situations, testing a range of different types of scenarios and risks over time. The Council also agreed to continue to strengthen crisis preparedness arrangements, including by ensuring that there are strong and effective coordination arrangements across agencies in both countries.

CFR Review into small and medium-sized banks

The Council discussed the Review into small and medium-sized banks requested by the Treasurer in July 2024. The Review is being conducted by the Council, in consultation with the Australian Competition and Consumer Commission (ACCC). The aim of the Review is to examine the role of small and medium-sized banks in providing competition, the regulatory and market trends affecting their competitiveness, and sources of, and barriers to, competition. The Review will seek to identify ways of better supporting competition while balancing other objectives, including financial stability.

The Council endorsed the Issues Paper for the Review into Small and Medium-sized Banks, published today alongside this statement. This Issues Paper sets out context for the review and seeks stakeholder views on a range of issues facing small and medium-sized banks. It provides an overview of the banking system and examines the regulatory framework and its proportionality, banks’ funding arrangements, and issues related to banks’ ability to enter, scale, and exit the market.

Following the consultation, the Council will provide a final report to the Government by 1 July 2025, with recommendations for consideration by the Government and CFR agencies.

Non-bank financial intermediation

The Council conducted its annual review of non-bank financial intermediation (NBFI), which includes activities of superannuation funds, insurers and financial institutions beyond the main regulatory perimeter, such as non-bank lenders.^[2] Superannuation funds account for around half of NBFI assets in Australia, and have historically posed little direct financial stability risk as they are predominately prudentially regulated defined-contribution funds and are constrained in their ability to take on leverage. The Council discussed the importance, however, of better understanding the potential for the superannuation industry to amplify shocks in the financial system − given its growing scale and interconnections with bank funding markets − with APRA’s system risk stress test in 2025 a key next step.

The Council assessed that the financial stability risks from non-bank lenders are currently contained by the sector’s small size and limited financial connections to banks. At the same time, strong growth in their asset base meant they should continue to be closely monitored. While there has been rapid growth in private credit globally, and some pick up in domestic activity, the Council noted the domestic private credit market remained small overall. The Council agreed to continue to closely monitor NBFI risks, with agencies continuing to take steps to improve visibility and close data gaps over time.

Other initiatives

The Council discussed a range of other areas, including APRA’s consultation on Additional Tier 1 (AT1) capital. It was also updated on FMIs and welcomed the passing of the FMI Regulatory reform legislation in September 2024, which will introduce a crisis management and resolution regime for the sector and enhance the regulatory powers of the RBA and ASIC.

The Council also reviewed the upcoming publication of the Regulatory Initiatives Grid, which is intended to give financial services providers clear visibility of regulation that might impact their businesses and support engagement with regulatory reforms.

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.