3. The Australian Financial System
The Australian financial system has remained There are a number of other longer-term resilient through a tumultuous year for the challenges for financial institutions to manage. economy and financial markets. The risks posed by information technology (IT) After a substantial decline in the first half of malfunctions and malicious cyber attacks are 2020, banks’ profitability recovered in the growing and a significant event could threaten second half and analysts expect it to strengthen financial stability. Another challenge will be to further in 2021. This has helped raise banks’ manage the broad range of risks arising from capital positions from already strong levels. climate change. These do not currently pose a Banks have abundant liquidity and funding. substantial risk to financial stability, but they Measures of banks’ asset quality have could over time if climate change risks to deteriorated a little in recent months as loan Australian financial institutions grow and are left repayment deferrals have come to an end and unaddressed. And financial institutions need to support for households and businesses has continue to maintain a focus on governance and tapered. However, banks had increased their embed a healthy culture to address the provision balances to absorb the impact of misconduct that has become apparent over the future defaults. past few years. Available information also points to other Banks resilience is supported by their financial institutions being resilient. The financial profitability … impacts of the pandemic tested the liquidity management of superannuation funds, but their Profitability recovered over the second half of systems proved effective in navigating this 2020 as banks raised provisions for credit challenge (see ‘Box C: What did 2020 Reveal impairments at a slower pace than in the initial about Liquidity Challenges Facing stages of the pandemic (Graph 3.1). Bad debts Superannuation Funds?’). General insurers will rise over 2021 as fiscal support is reduced remain well capitalised and have increased their and a small share of loans previously granted provisions for potential business interruption repayment deferrals move into arrears (see claims arising from the pandemic. However, the below). However, banks have bolstered their life insurance industry has to address stock of provisions in anticipation of these longstanding issues that continue to result in losses. Current provisions are around 40 per cent losses. Financial market infrastructures have above recent years, though still below the levels recently experienced some operational in the aftermath of the global financial crisis. Net disruptions, underscoring the importance of interest income was broadly unchanged over continually assessing and improving their 2020, while costs increased a little relative to resilience. income. Analysts expect banks’ headline return
FINANCIAL STABILITY REVIEW – APRIL 2021 37 on equity (ROE) to continue to recover over the to-earnings ratios have risen since the middle of coming year, and be above their cost of equity. last year and the implied cost of capital has As interest rates have fallen a larger share of declined relative to other listed companies bank deposits has paid low interest rates (Graph 3.2). More generally, estimates of the (between zero and 25 basis points). This can equity risk premium for listed companies (the squeeze net interest margins (NIMs) because as implied cost of equity minus the risk-free interest rates fall, deposits that already receive zero or rate) indicate that increased risk-taking by very low interest rates have not been repriced investors has not unduly bid up the prices of lower in line with lending rates or the return on equities over 2020, since the equity risk liquid assets. premium is marginally above its average of recent years. Despite this, the evidence for Australia is that lower rates do not have a meaningful impact on … and strong capital ratios overall bank profitability. Lower rates are generally associated with a small reduction in Australian banks’ profitability over recent years banks’ NIMs, but this effect is offset by a has enabled them to build substantial capital reduction in borrowers’ debt-servicing burdens buffers to absorb future losses. Their Common (lowering bad and doubtful debts) and an Equity Tier 1 (CET1) capital ratios are increase in aggregate demand. NIMs are also substantially above their prudential minimum being supported in the current environment by requirements, giving them large management the broad reduction in banks’ funding costs. capital buffers in addition to 2½–3½ percentage Funding costs are estimated to have fallen by a points of regulatory capital buffers (Graph 3.3). little more than the cash rate since the start of Reflecting this, the 4 major banks’ capital ratios 2020 because of a shift in the composition of on an internationally comparable basis are deposits (towards cheaper at-call deposits) and estimated to be towards the top of the range of the Reserve Bank’s package of policy measures similarly sized banks globally and at a level that (including availability of cheap funding provided has historically been sufficient to withstand [2] by the Term Funding Facility (TFF)).[1] almost all previous banking crises. Mid-sized and smaller banks are also well capitalised. Financial market indicators also suggest Additional capital over regulatory minima for investors are confident that banks’ future earnings will remain resilient. Banks’ share price-
Graph 3.1 Graph 3.2 Bank Valuations Banks’ Profitability ratio Forward price-to-earnings ratio ratio % Return on equity* % 20 20 Pre-provisions 16 16 15 15
8 8 10 10 ASX 200 banks
% Equity risk premiums* % % Provisions as a share of loans % 10 10 1.0 1.0 7 7
0.5 0.5 4 4 ASX 200 (excl. banks) 1 1 0.0 0.0 2005 2009 2013 2017 2021 2005 2009 2013 2017 2021 * Forward earnings yield spread to 10-year real Australian Government * Dot represents forecast based on 12-month forward earnings Bond Sources: APRA; RBA; Refinitiv Sources: RBA; Refinitiv
38 RESERVE BANK OF AUSTRALIA these banks are generally similar to, or larger Liquidity in the banking system is than, those of the major banks. also high Banks have also been able to increase their Banks’ holdings of high-quality liquid assets capital ratios since the onset of the pandemic. (HQLA) have increased over the past year, CET1 capital ratios for the banking system as a facilitated by ample access to low-cost funding whole rose by over 100 basis points over this (in part due to RBA bond purchases) and low time, with around $16.9 billion in additional demand for credit. This, in combination with the CET1 capital being generated. More than half of undrawn portion of the TFF (which is treated as this came from retained earnings, reflecting a liquid asset), has caused banks’ liquidity continued profitability and reduced dividend coverage ratios (LCRs) to rise substantially payout ratios (in line with guidance from the compared with late 2019 (Graph 3.4). The Australian Prudential Regulation Authority increase has been even more pronounced for (APRA)). The remainder mostly reflected NAB’s smaller banks than for the 4 major banks. LCRs $4.25 billion in new issuance in the June quarter are currently above banks’ targeted levels but last year and new issuance associated with could shift back to within targets over the next dividend reinvestment. Looking ahead, planned 12 months. Banks’ LCRs could reduce when the asset sales are expected to provide further window of taking up remaining TFF allowances support to banks’ capital positions. expires on 30 June 2021. The size of this reduction will depend on the extent to which In recognition of banks’ healthy capital positions, banks draw down on remaining allowances as and the improved economic outlook, from well as how TFF funds are invested. Many banks December 2020 APRA relaxed its guidance on have indicated in liaison that they plan to take banks’ dividends. However, banks will need to up most or all of their remaining allowances retain sufficient capital to ensure they have the ahead of the deadline. capacity to continue to provide credit to the real economy and in doing so support the economic APRA recently approved requests from banks for recovery from the COVID-19 recession. a reduction in their allocations under the Reserve Bank Committed Liquidity Facility (CLF), reducing the total CLF available by $84 billion to $139 billion. The CLF is intended to be large
Graph 3.3 CET1 Capital Ratios Graph 3.4 Using current capital framework, December 2020 % % Liquidity Coverage Ratio All currencies % %
15 15 180 180
Range across all banks* 160 160 10 10
140 140
5 5 120 120 Major banks**
0 0 100 100 Major banks Other ASX-listed Unlisted banks** banks Minimum requirement Regulatory buffer* 80 80 2015 2016 2017 2018 2019 2020 Additional capital * * Excludes confidential Pillar II requirements From the 10th to 90th percentile of all banks’ liquidity coverage ratios ** Some banks have capital ratios above 20 per cent (not shown) ** Weighted average of the major banks’ ratios Sources: APRA; RBA Sources: APRA; RBA
FINANCIAL STABILITY REVIEW – APRIL 2021 39 enough to offset the limited amount of HQLA expiration and managing the timing mismatch available in Australia due to low levels of govern- through holding excess liquid assets. Liaison ment debt. Over the past year, issuance of with banks indicates that they are carefully Australian Government Securities and semi- planning for this task and will choose based on government bonds has increased significantly to the relative cost and efficiency of these options fund the fiscal policy response to the pandemic. closer to the time. In doing so, banks are also In its announcement APRA noted that if the mindful of the potential impact of expiring TFF amount of government securities outstanding funds on their Net Stable Funding Ratios, which continues to increase beyond 2021, the CLF may could fall by up to 4 percentage points (from a no longer be required in the foreseeable future. current level that is 24 percentage points above Banks have ample access to low-cost deposit their minimum requirement). and other funding, and have reduced their funding from wholesale debt. Spreads on short- Banks’ non-performing loans have risen term and long-term wholesale debt have fallen Measures of banks’ asset quality have to historically low levels, given reduced supply deteriorated somewhat in recent months and market conditions. Strong demand for (Graph 3.6). This trend is likely to continue over Australian banks’ debt is highlighted by spreads coming months given the unwinding of support declining for Tier 2 debt, even though the major measures such as JobKeeper (see ‘Chapter 2: banks need to raise more of this debt to satisfy Household and Business Finances in Australia’). APRA requirements for Total Loss Absorbing The end of APRA’s concessional treatment for Capacity. loan repayment deferrals in March will also lift loan arrears, as APRA’s concession allowed most Banks will need to manage future loans on deferral as part of a COVID-19 support refinancing requirements package to be treated as ‘performing’. The The TFF has lowered banks’ funding costs and quality of Australian banks’ New Zealand assets provided them with ample liquidity. However, has also declined. banks will face a sizeable refinancing task when Current indications are that the increase in non- these funds must be repaid in 2023/24 . Banks performing loans will be modest. The vast have drawn $81 billion that is due for repayment majority of borrowers that requested loan by around September 2023, and could draw an repayment deferrals in 2020 have subsequently additional $109 billion by June 2021 (of which $16 billion has already been drawn) that would Graph 3.5 be due for repayment after 3 years. Together Banks’ Refinancing Task with bonds maturing, banks will need to Semi-annual $b $b refinance around $120 billion in the 6 months Bond maturities TFF repayment (2023) TFF repayment (2024)* around each of these dates (Graph 3.5). This will 120 120 be banks’ largest ever refinancing task, though there are many factors that will influence how 90 90 challenging it proves to be (including demand 60 60 for loans over coming years). Banks have a number of options to manage 30 30 these repayments. These include raising debt in 0 0 wholesale markets at the time, spreading out 2012 2016 2020 2024 * Assuming banks draw all remaining allowances by June 2021 the refinancing task before and/or after the TFF Sources: Bloomberg; RBA
40 RESERVE BANK OF AUSTRALIA been able to resume repayments, and banks Statement on Monetary Policy over the past year. entered 2021 with a very low share of non- APRA’s modelling showed that the aggregate performing loans. Most loans, including those in CET1 capital ratio across all banks would decline arrears, are well secured and the resilience of materially under this scenario to 6.6 per cent but property prices to date – particularly for remain well above the prudential minimum of residential property – should further limit 4.5 per cent. The main driver of the declines is potential losses for lenders (and enable credit losses, of which losses on business credit borrowers struggling with repayments to sell contribute a bit less than half, while losses on without losing much of their previously residential mortgages contribute around one- accumulated equity). The government’s third. Rising risk weights account for most of the announcement of the SME Recovery Loan remaining declines in capital ratios. Consistent Scheme will also support credit quality by with this, the RBA’s reverse stress testing model offering cheap loan refinancing to firms that implies that it would take a recession have been heavily affected by the pandemic but comparable to the Great Depression for are otherwise healthy.[3] Banks have also raised CET1 capital ratios to fall below 6 per cent.[5] substantial provisions in anticipation of Nonetheless, both APRA’s and RBA’s results are expected credit losses (as noted above) and they subject to considerable uncertainty and it is have scope to raise further provisions (while possible that greater stress could arise from remaining profitable) if the need arises. factors that are not well captured by the Even if economic conditions were to deteriorate modelling. significantly, stress tests suggest that banks would remain sound. APRA recently assessed APRA is refining the regulatory whether banks could withstand a severe framework for banks … economic contraction, in which GDP fell by In December, APRA released an update of its 15 per cent, unemployment rose to over proposed revisions to the capital framework.[6] 13 per cent and national housing prices fell by These revisions will not require the banking over 30 per cent.[4] This is much worse than any system to raise additional capital, but will of the downside scenarios presented in the increase the flexibility of bank capital and improve the allocation of capital to risk. The reforms also embed the ‘unquestionably strong’ Graph 3.6 benchmark within the capital framework and Banks’ Non-performing Loans* Domestic books, share of loans by type more closely align the measurement of capital % % Total Housing Business ratios with recently revised Basel III standards.
4.5 4.5 One of the aims of the proposed revisions is to Impaired build greater flexibility into the capital
3.0 3.0 framework, so as to increase the ability of banks Non-performing** to use capital and continue to lend during
1.5 1.5 periods of stress. This is addressed by banks having larger capital conservation buffers and Past-due 0.0 0.0 raising the default level of the countercyclical 2011 2021 2011 2021 2011 2021 * Break at June 2019 due to the introduction of the Economic and capital buffer to 100 basis points (from zero). The Financial Statistics; banks have generally been allowed to classify most loans under deferral as part of a COVID-19 support package as performing non-zero countercyclical capital buffer will ** Sum of ‘past-due’ (i.e. 90+ days in arrears and well-secured) and impaired (i.e. in arrears or otherwise doubtful and not well-secured) provide APRA with greater capacity to reduce loans Sources: APRA; RBA
FINANCIAL STABILITY REVIEW – APRIL 2021 41 capital requirements in response to changes in Risks in non-bank financial institutions systemic risks. remain contained … The reforms will also make the capital framework General insurers’ profitability declined to almost more risk sensitive, which will reinforce the zero in 2020 (Graph 3.7). However, they remain incentive for sound lending practices. In well capitalised and analysts expect their particular, higher-risk types of housing loans profitability to recover in 2021. Analysts’ such as investor, interest-only, and highly forecasts for a recovery in profits in 2021 are leveraged loans will require banks to hold more underpinned by expectations that there will not capital than equivalent owner-occupier principal be a repeat of the factors that reduced profits in & interest loans. The average risk weight on 2020. In particular, profits were curtailed by residential mortgages will also increase for the substantial provisioning for potential business banking system as a whole, while there will be interruption (BI) claims arising from the an offsetting decline in risk weights on business pandemic. Recent floods have lifted claims, but lending. APRA expects to finalise the framework analysts currently expect the impact of natural in 2021 and implement it from January 2023. disaster claims to be less than last year (in part because of increased reinsurance cover … and oversaw an orderly bank exit following last year’s catastrophic bushfires and severe storms). However, there is considerable Xinja, a small ‘neobank’ that received its full uncertainty around these expectations. Sharp banking license in September 2019, announced falls in asset prices in early 2020 also resulted in in December 2020 that it would hand back its large investment losses that were only partially banking licence and return all deposits to reversed as asset prices recovered. customers. This decision was made in light of Xinja’s inability to secure enough capital to offset The $1.7 billion of provisions the major general its depletion of cash (resulting from paying more insurers have raised for potential BI insurance for deposits and operating expenses than it payouts mostly came in response to a court received on its assets, which did not yet include ruling that many such policies did not effectively loans). APRA had been working with Xinja for exclude cover for pandemics, despite that being some time prior to ensure that if an exit was the insurers’ intent. The size of insurers’ required, it would be orderly. In the event, APRA’s contingency planning arrangements Graph 3.7 worked broadly as anticipated and in the space General Insurers’ Profitability and Capital of just a few weeks more than 99 per cent of Calendar year % Return on equity % Forecasts* deposits were returned directly to customers 20 20 (with the remainder returned via new accounts 10 10
at NAB). In light of this experience, and what it % Claims ratio** % learnt from other new Australian banks that 75 75 received their licence in recent years, APRA is 65 65 strengthening its requirements for granting new ratio Prescribed capital amount coverage ratio*** ratio 2.0 2.0 banking licences. The revised expectations place General 1.5 1.5 LMI a greater focus on the longer-term sustainability 1.0 1.0 of business models.[7] 2006 2010 2014 2018 2022 * Analyst ROE forecasts from Bloomberg ** Ratio of net incurred claims to net premium; change in reporting basis after June 2010 *** Eligible capital as a multiple of prescribed capital amount or minimum capital requirement (prior to March 2013) Sources: APRA; Bloomberg; RBA
42 RESERVE BANK OF AUSTRALIA exposures to BI claims remains uncertain, in part at non-bank lenders has remained sound, both due to the continuation of legal proceedings on for lending to households and to businesses. this matter (which are discussed further in One indication of the resilience of the sector has ‘Chapter 4: Domestic Regulatory Develop- been its ability to manage loan repayment ments’). APRA has closely monitored the deferrals. Both the share of (prime) customers on potential impact BI could have on insurers and deferral at non-banks and the credit quality of will continue to do so into 2021. their deferred loans (during and after the The low interest rate environment also presents deferral period) appears to be similar to those of some risk to general insurers if they do not banks. reprice policies in response to expected lower investment returns. In addition, insurance … though life insurers have significant policies that cover risks for many years after the problems to address … policy expires (‘long-tailed’) face some risk since The pandemic has had a limited impact on life falling real interest rates increase the discounted insurers’ profits, other than by depressing returns value of insurers’ future liabilities. While most on investment income. However, longstanding general insurance in Australia is short-tail (that is, issues continue to result in them making losses policies where claims are identified and made (Graph 3.9). Individual disability income within about a year), compulsory third party insurance has been a major contributor to these motor vehicle, product and public liability, losses, reflecting a long period of substantial professional indemnity and workers underpricing and overly generous product compensation insurance are all long-tail classes features and terms that have resulted in higher- that are exposed to this risk. However, general than-expected claims. APRA intervened in late insurers in Australia mostly mitigate this risk 2019, requiring firms to adjust their insurance through asset-liability maturity matching. policies to make them more sustainable and Lenders’ mortgage insurers (LMIs) profitability imposing capital charges until these measures has been affected by the COVID-19-induced were implemented. While this intervention was economic downturn, but they retain a very temporarily suspended in March 2020 owing to strong capital position. The decline in profits in COVID-19, APRA reinstated it in October 2020. 2020 resulted from pandemic-related increases The adequacy of firms’ responses are currently in the expected future value of mortgage being assessed by APRA. However, this issue is insurance payouts and an associated increase in their reserves. However, the resilience of the economy, and particularly housing prices, has Graph 3.8 materially improved the outlook for LMI profits, Non-bank RMBS $b Issuance $b as has increased demand from first home 7.5 7.5 buyers. 5.0 5.0 Non-banks have grown their housing lending 2.5 2.5 since late last year, after curtailing it at the height bps Primary market pricing* bps of the pandemic. As funding conditions have 300 300 Prime Non-prime improved, issuance of residential mortgage- 200 200 backed securities (RMBS) by non-bank lenders 100 100 has risen to high levels and spreads have 0 0 2005 2009 2013 2017 2021 declined to their lowest levels since 2007 * Face-value weighted monthly average of the primary market spread to bank bill swap rate for AAA rated notes (Graph 3.8). Liaison indicates that credit quality Sources: Bloomberg; RBA
FINANCIAL STABILITY REVIEW – APRIL 2021 43 expected to persist for some time given the between 18 and 23 November. An unrelated long-term nature of these insurance contracts issue also caused a delay of several hours in the and the associated large book of legacy settlement of equity trades on 17 November. business, as well as the potential for increased The Australian Securities and Investments mental health issues arising from the pandemic. Commission (ASIC) has commenced an investigation into whether ASX met its … and financial market infrastructures obligations under its Australian Market Licence, (FMIs) continue to focus on improving including whether it has sufficient financial, operational resilience technological and human resources to operate The operational resilience of FMIs, such as its markets. The Bank and ASIC have expressed central counterparties (CCPs), securities significant concern regarding these incidents settlement facilities and high-value payment and have asked ASX to have an independent systems, is important to enable financial system review of the incidents conducted in the first participants to prevent credit or liquidity risks half of 2021. building up. More broadly, this can help to While other FMIs in Australia have not underpin confidence in the operation of capital experienced similar operational issues in recent markets. Recent events have shown the months, they continue to pursue improvements. importance of FMIs continually assessing and For example, the Bank is in the final stages of a improving their operational resilience. multi-year project to refresh the core infras- In late 2020, ASX experienced a number of tructure for its high-value payment system, the significant operational incidents that affected Reserve Bank Information and Transfer System the availability of systems used in trading and (RITS). It is also implementing a program of settlement of ASX equities and equity options. improvements to its IT operational practices that Problems following a major upgrade to ASX’s include a number of initiatives aimed at core equity trading platform, ASX Trade, resulted enhancing the operational stability of RITS. in the closure of the ASX market for most of the Another requirement for financial participants to day on 16 November, while ASX’s Centre Point be able to manage risk appropriately is for FMIs order matching service was partially unavailable to be operating when needed. In recognition of this, the London-based CCP LCH Limited (LCH Ltd), which provides clearing services to Graph 3.9 Australian participants in the over-the-counter Contributions to Life Insurers’ Profitability Calendar year interest rate derivatives market via its SwapClear % % service, has been working to better align its 15 15 operating hours with the Asia-Pacific markets
10 10 that it serves. Due to time zone differences, these services are typically unavailable for 5 5 several hours at the start of the Australian 0 0 business day and LCH Ltd’s participants bear
-5 -5 bilateral credit risk exposures to one another until the CCP is able to clear the trades that have -10 -10 2010 2012 2014 2016 2018 2020 been executed. LCH Ltd has brought forward its Individual death/TPD* Non-participating investment-linked Individual disability Other** opening time incrementally in recent years. The Group policies Return on equity
* TPD = total and permanent disability Bank’s 2020 Assessment of LCH Ltd’s SwapClear ** Includes profit from other non-risk business Sources: APRA; RBA Service sets a regulatory priority for LCH to
44 RESERVE BANK OF AUSTRALIA continue this work, while maintaining the manage risk. The integrity of data is particularly resilience of its operations. important since it dictates the ability of banks to disburse funds or collect on monies due and, in Financial institutions need to carefully the extreme, if violated it could raise questions manage technology risks … about the institution’s solvency. More generally, Risks to financial institutions’ IT systems – from any data breaches that cause consumers and both malicious attacks and malfunction – creditors to lose confidence in the security of require ongoing attention and robust the financial system could see banks face management, both globally (see ‘Chapter 1: The liquidity challenges. Global Financial Environment’) and domestically. These risks have grown as digital platforms and … and address the longer-term service channels become more ingrained and challenges of climate change more complex and as a result of the increased Climate change presents an ongoing challenge incidence of remote working arrangements. for the financial system, by exposing it to risks They have recently been highlighted by a data that will rise over time and, if not addressed, breach involving a legacy file sharing service run could become considerable.[8] These financial by Accellion, a third-party technology provider, risks are already beginning to become apparent which affected a wide range of entities including in some cases. For example, investors in BP and ASIC and the Reserve Bank of New Zealand. The Shell suffered losses as both heavily wrote down operational disruptions experienced by ASX in the value of their oil and gas assets in June 2020. November (discussed above) also demonstrate This was partly in response to the drop in energy the risks associated with technology prices associated with the pandemic and global malfunction. The constantly evolving nature of recession but also in expectation that the global cyber risks means it is critical that financial economic recovery will be associated with an institutions regularly update and upgrade their accelerated pace of transition to a lower carbon defences. In recognition of this, Australian economy. regulators have a number of initiatives to One way in which financial institutions are support financial institutions’ efforts to exposed to the physical risks of climate change strengthen cyber resilience (see ‘Chapter 4: is via the potentially negative impact it could Domestic Regulatory Developments’). have on the value of housing collateral in Cyber attacks and incidents are most likely to locations that are more affected by climate risk, involve manageable financial losses for specific particularly if these risks become uninsurable. institutions, but they could have systemic Such regions include agricultural and farming implications in certain circumstances. To be regions in NSW and Queensland, as well as systemic, the impact of cyber attacks and metropolitan areas adjacent to the ocean and incidents would have to affect multiple waterways. Data show that the share of banks’ institutions, either directly or indirectly. This current mortgage exposures that are in regions could occur if they affect third-party providers or projected to experience a material increase in software used widely across the financial system. climate damage is around 6 per cent.[9] Insurers Similarly, if such an incident affected critical are more exposed to physical risks from climate nodes, such as an FMI (including payment change through policies covering natural systems or CCPs) for a prolonged period it could disaster damage to property, motor vehicles, directly impact the ability of firms and crops and other assets. Banks also face risk from households to engage in economic activity and any policy and technological changes intended
FINANCIAL STABILITY REVIEW – APRIL 2021 45 to minimise climate change (‘transition risk’). Culture and governance also need This is most likely to affect the quality of bank ongoing focus lending to carbon-intensive industries, which Financial institutions also need to continue to account for around 20 per cent of banks’ total focus on culture and governance issues that exposures. Banks and insurers need to measure became apparent in recent years. If not and address these risks early to mitigate the addressed, cultural problems can significantly future financial risk they pose to the institution, erode public trust in financial institutions. They and so also to future financial stability. can also reduce profitability through the Some work is starting to be done by industry to payment of hefty remediation costs and measure and address the financial risks of penalties (such as those paid by CBA and climate change. For example, the Climate Westpac for significant breaches of anti-money Measurement Standards Initiative – an industry- laundering and counter-terrorism financing led, collaborative framework that sets standards laws) or the imposition of tighter restrictions on for more comprehensive and harmonised their operations (including increased capital disclosure of data on risks posed by climate charges, such as those imposed on the 4 major change – was launched last year. Around half of banks, Macquarie Bank and Allianz). Recent ASX100 listed financial firms are also disclosing failures to correctly measure various banks’ LCRs climate risks following the global framework also show the risks associated with not established by the industry-led Task Force on prioritising the measurement of financial risk. Climate-related Financial Disclosures. In recognition of the importance of these issues, Meanwhile, APRA will release a draft of its cross- APRA recently restarted work on ensuring that industry prudential practice guide on the remuneration arrangements encourage good management of climate-related financial risks for practice and culture. It also completed a review consultation later this month, with a view to of ANZ, CBA and NAB’s implementation of the finalising in the second half of this year. It is also Banking Executive Accountability Regime undertaking work on measuring the risks that (BEAR). (Westpac was not included due to climate change could pose to banks by ongoing investigations, now complete, into conducting a ‘climate vulnerability assessment’ potential breaches of the Banking Act.) APRA in 2021, working together with banks and the found that while each of these 3 major banks Council of Financial Regulators. The work had designed adequate frameworks to domestically is in line with the increasing focus implement BEAR, they all have further work to globally by regulators on addressing climate achieve acceptably clear and transparent risks in the financial sector. accountability.
Endnotes [1] See Garner M and A Suthakar (2021), ‘Developments [3] Details of the scheme can be found at the Treasury in Banks’ Funding Costs and Lending Rates’, RBA website. Available at
46 RESERVE BANK OF AUSTRALIA [6] See APRA (2020) ‘A More Flexible and Resilient Capital [8] See RBA (2019), ‘Box C: Financial Stability Risks From Framework for ADIs’, Discussion Paper, December. Climate Change’, Financial Stability Review, October. Available at
FINANCIAL STABILITY REVIEW – APRIL 2021 47