March 27, 2024

APRA foresees super funds overtaking banks

Australia’s major superannuation funds can expect to be the subject of the same sort of regulatory stress-testing imposed on banks, with the Australian Prudential Regulation Authority (APRA) pointing to the super sector being on track to overtake the banking sector.

Flagging APRA’s plans for a system-wide stress test of the Australian financial system, APRA chair, John Lonsdale noted that while the banking industry remained the cornerstone of the Australian financial system, it was being increasingly challenged by superannuation.

“Over the past decade, the value of assets managed by the superannuation sector has grown at almost double the rate of banking – 8.8% a year compared to 4.8%,” he said. “If this trend continues superannuation assets will exceed the size of the banking sector in time.”

“To be clear, superannuation doesn’t need to be bigger to have an influence over financial stability,” Lonsdale said.

The APRA chair pointed to the interconnectedness of the Australian financial system as a justification for the prudential regulator stress testing the broader financial system.

“The intention behind the new test is to sharpen APRA’s response to systemic risks by deepening our understanding of the transmission mechanisms of shocks across the financial system,” he said.

“We hope to gain insight into the impacts of spill over and amplification risks between industries and identify possible ‘blind spots’ in our supervisory regime. Learnings from the process would also inform our future stress testing program, including similar future exploratory and industry-specific exercises.”

Earlier in his address to a banking forum in Sydney Lonsdale pointed to the interconnectedness of the financial system being exhibited by commercial property stating – “banks lend to it, super funds invest in it and insurers underwrite it”.

“Many workers, however, despite their employers’ best efforts, don’t want to use it as much as they once did and would prefer to work partly or fully from home,” Lonsdale said.

“Should we see a major correction in commercial property valuations, all three industries – banking, super and insurance – would be impacted.”

“Climate risk is another inter-related area. The declining affordability and accessibility of property insurance in many parts of Australia, for example, isn’t only bad news for those communities. It also impacts the ability of households and businesses to get credit, to rebuild after a disaster or to repay loans, and might also impact super though requests for early releases on compassionate grounds.”