Pressure on financial sector ''likely to intensify''

by Madison Utley20 Jan 2020

The Australian Prudential Regulation Authority (APRA) has released its inaugural ‘Year in Review’ publication, summarising the regulator’s activities over 2019 and forecasting continued turbulence in the financial sector into 2020.

According to APRA chair Wayne Byres, last year saw a “significant recalibration of APRA’s focus and breadth of responsibilities”.

Within the financial system, this was manifested through:

  • More “intense scrutiny” of the institutions APRA regulates
  • An expansion of its risk-based supervision into new areas
  • Putting data to better use for decision-making
  • Greater resolution capability preparedness
  • Enhancing the leadership, people and culture within APRA itself

Overview of the operating environment

Subdued economic growth was a dominate feature of the last year. Housing credit crept up at the lowest rate since the data series began in the 1970s – with all progress occurring within the owner-occupier space and none with investors. Yet still, household debt continued to grow faster than household income.

According to the APRA report, “Very low interest rates, while appropriate for the economy as a whole, added challenges for the financial sector.

“Coupled with subdued credit growth for banking institutions, profitability, and therefore capital generation – essential for balance sheet growth – faced additional headwinds in 2019, and will likely remain under pressure in 2020.

In such an environment, with pressure “likely to intensify” in the year ahead, the report stated “there is no room for complacency” regarding the safety and stability of the financial system, which is APRA’s primary mandate.

Performance of ADIs

According to APRA, over 2019, ADIs were well capitalised, had strong asset quality and funding, and were profitable, despite the banking sector being “exposed to a number of headwinds and vulnerabilities”.

Those weaknesses included high and rising household debt, ongoing reliance on foreign wholesale funding, historically low interest rates, and low rates of economic growth. Further, operational risks for ADIs were heightened, with evidence of underinvestment in compliance, IT systems and data management.

As of 30 June 2019, there were 148 ADIs operating in Australia, up from 145 the year before – the first net increase in sector participants in nearly 15 years.

The total comprised of 93 banks, 47 credit unions and building societies, seven other, and one restricted ADI.

Total ADI industry assets stood at $4.54tr, up from $4.32tr the year prior.

The industry remained concentrated, with the four major banks holding around 75% of industry assets, only a marginal reduction in concentration compared to prior years.

APRA’s transparency

The Year in Review report is another in the string of measures designed to cultivate a broader understanding of the regulator’s activities and progress.

Over the past 12 months, APRA has “substantially increased” the amount, frequency and clarity of information provided to the community to drive accountability – both for the regulator itself and the entities it regulates.