Banking sector remains strong, but crypto, housing challenge grows: APRA

The chair of the Australian Prudential Regulation Authority (APRA), Wayne Byres, spoke at the recent AFR Banking Summit on the current state of the Australian financial system, addressing the various geopolitical thematics, economic headwinds and ongoing tensions at play. He also touched on housing, climate action and digitisation. The Australian banking system has undergone reforms […]

The chair of the Australian Prudential Regulation Authority (APRA), Wayne Byres, spoke at the recent AFR Banking Summit on the current state of the Australian financial system, addressing the various geopolitical thematics, economic headwinds and ongoing tensions at play. He also touched on housing, climate action and digitisation.

The Australian banking system has undergone reforms to its capital framework, a painstaking Royal Banking Commission and the introduction of tough new rules, to ensure the durability and stability of the banking system during times of crisis. Byres touched on this in his speech saying, “A key lesson of recent crises has been that a strong banking system can borrow and lend; a weak banking system struggles to do either.

“The good news is that after a decade of reform and resilience building, Australia is fortunate to have a strong banking system. It is well capitalised, in both historic and international terms. It also has a stronger funding profile than years gone by and remains highly rated with good access to international markets,” he continued.

With interest rates on the rise, economists are sounding alarm bells on the property market. In the past housing, and loans, have been as safe as houses. But that may not be the case anymore with rates changing trend for the first time in decades. Clearly, if the RBA sees inflation becoming entrenched it will be forced to move more aggressively than expected in terms of normalising interest rates in the years ahead.

In a concerning admission, Byres said, “Aggregate dollar losses from housing portfolios now regularly exceed that from other portfolios in our stress tests.” Financial institutions face added further challenges from Australia’s transition to a low-carbon economy and 2050 net-zero emissions target. APRA released a prudential practice guide on the financial risks of climate change which outlined not only risks but opportunities from this transition. Without a doubt, the regulatory framework will change once again to be ahead of the curve.

“Governments and regulators around the world are responding to this at varying speeds. Two particular issues are high on APRA’s agenda: the increased usage of stored value facilities and payment stablecoins, which can have the look, feel and functionality of a traditional bank deposit, but without any the regulatory protection; and new business models, such as aggregator apps and banking-as-a-service, which test regulatory boundaries and can make it difficult for consumers to understand exactly who they are entrusting their money to,” said Byres.

All in all, Byres is confident the Australian financial system will play a key role in keeping the economy stable so that it can weather the challenges ahead. APRA’s regulatory and supervisory priorities will need to adjust accordingly to be flexible enough to respond to new forms of money, payment and finance.