APRA warns super funds’ bank holdings could spark systemic crisis
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The news: The Australian Prudential Regulation Authority (APRA) has warned the high levels of bank debt and equity being held by the nation’s superannuation funds could pose a systemic risk, as the regulator intensifies testing of Australia’s economic resilience to global shocks.
Releasing a system risk outlook on Thursday, APRA said the sector has far greater bank exposer than aggregate data would suggest.
The regulator indicated while superannuation funds account for just over 10% of the banks’ total domestic funding in aggregate, they hold around 30% of the industry’s short-term debt and equity. The figure rises to 40% when including indirect claims via external funds investing superannuation dollars.
The warning is amid stress testing of Australia’s five largest banks, with APRA focused on how they would handle a major global energy supply shock, and a subsequent spike in oil prices, unemployment, inflation and a significant fall in property prices.
What they said: “If superannuation funds were forced to sell these assets rapidly during a stress event, this could increase bank funding costs and potentially exacerbate liquidity stress across the system,” APRA said.
While the regulator said the Australian financial system remained resilient, APRA has become increasingly focused on its ability to absorb economic shocks, conducting a stress test last year to better understand interdependencies between the banks and super funds.
“These interconnections can enhance efficiency, but they can also amplify the transmission of stress when shocks occur. Direct financial links — such as funding relationships between institutions — can leave both entities exposed in the event of a sudden withdrawal of funds or default,” APRA said.
“Indirect links, including common exposures through financial markets, can also transmit stress across the system. Maintaining visibility of these linkages is an important part of APRA’s work to support system-wide resilience.”
The regulator maintained the system could withstand “severe but plausible shocks”, with strong capital buffers, solid profitability and increased provisioning further increasing system resilience.
“APRA is closely monitoring developments that could pose challenges to liquidity over time, including exposures to unlisted assets and growing interconnectedness across the system.”
APRA is also currently conducting a joint Australia-New Zealand stress test in conjunction with the Reserve Bank of New Zealand in the first of its kind exercise, with a focus on understanding how a deep energy shock could generate a spike in unemployment and a fall in property prices.
The context: Capital Brief has previously reported the industry expects vulnerabilities in the system, including liquidity risks, to be exposed when the regulator releases more results from its stress test later this year.
Earlier this month it also sent a letter to banks, super funds and insurers warning of the acute cybersecurity risks posed by AI and flagging their governance arrangements had not kept pace.
The source: APRA
