The APRA has issued a directive that will reshape the approach Australian financial institutions take towards managing risks.
According to The Adviser, in its latest corporate plan, APRA has unveiled a strategy to ensure the robustness and resilience of the nation’s banks, insurers, and superannuation trustees through enhanced regulatory measures focusing on climate, cyber, and interconnected financial risks.
Significantly, APRA is setting new benchmarks for financial entities, demanding heightened consideration of climate-related risks when making financial decisions such as lending and investment. This policy shift aims to align domestic practices with global best standards amidst increasing incidents of climate-related disturbances which influence asset values and revenue generation.
A pivotal component of APRA’s enhanced regulatory framework is the introduction of a Climate Vulnerability Assessment (CVA). This assessment will analyse the impact of climatic changes on the affordability of household insurance, studying major insurers that dominate about 80% of the market through 2050.
Moreover, APRA plans to embark on Australia’s inaugural system stress test. This exercise aims to better comprehend the interconnections within the financial system, a need underscored by recent global financial disturbances and geopolitical tensions. This test will encompass several systemically important banks and will progress through a design and implementation phase in the upcoming financial year.
Additionally, APRA has indicated an extension of its regulatory scope to include payment systems, a move prompted by the increasing number of entities with innovative business models seeking prudential regulation. In partnership with the Council of Financial Regulators, APRA will explore a new legislative framework for payments licensing, which is dependent on the passage of new legislation.
APRA’s initiative reflects a growing global emphasis on the environmental impact on financial systems, including the repercussions of biodiversity loss. The regulator’s actions are set to progressively elevate industry standards, focusing not only on sustainability but also ensuring that entities are equipped to manage severe but plausible stress scenarios effectively.
“Aligning them with emerging best practice globally”, APRA CEO said, “is essential not only for the health of the financial sector but also for the broader community impacted by these risks.”
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