The Australian Prudential Regulation Authority (APRA) has published a new report on APRA’s assessment of risks and vulnerabilities facing the Australian financial system.

The new System Risk Outlook report, which will be published twice a year, sets out APRA’s views on the domestic and international risk environments which inform its regulatory priorities.

Key insights from this first publication include:

• Risks to the Australian financial system from overseas are heightened, and the geopolitical environment is expected to remain volatile for some time. While the system is well-placed to absorb potential shocks from overseas, this resilience could be eroded if institutions are not prepared for a wide range of scenarios. APRA and the other agencies on the Council of Financial Regulators are strengthening the system’s resilience through a dedicated geopolitical risk work program.
• APRA is closely monitoring any build-up of domestic vulnerabilities, particularly in the housing market, including high household debt. While overall housing lending standards remain sound, APRA is seeing some signs of a pick-up in higher risk lending, particularly high debt-to-income borrowing by investors.
• The increasing interconnectedness of the financial system has elevated the potential for shocks in one sector to have a system-wide impact.

The report also includes a summary of the findings from Phase 1 of APRA’s inaugural system risk stress test, which was undertaken this year with the four major banks and six large superannuation funds.

APRA says that the key findings from Phase 1 suggest that the structural features of super funds mean that the industry acts as an important stabiliser for the system during stress but, in some cases, their actions can also amplify the negative effect of the shock on members and the system.

APRA will shortly commence Phase 2 of the exercise, which will test the robustness of the Phase 1 findings and consider other areas of analysis.

APRA expects to publish a final detailed report of the findings of the system risk stress test, incorporating Phase 2, in mid-2026.

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Author: David Jacobson
Principal, Bright Corporate Law
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