APRA will soon begin a comprehensive review of its governance prudential framework, the APRA chief, John Lonsdale, said yesterday.

“Our goal is to create a single cross-industry standard that strengthens our expectations on directors’ skills and integrity to ensure boards are better positioned to respond to uncertainty and shocks in the operating environment” Lonsdale said.

Lonsdale also used a speech to the European Australian Business Council to elaborate on an upcoming new system risk stress test, foreshadowed last week.

“Although not specifically a response to heightened global volatility, APRA’s new system risk stress test is another tool that is designed to increase our understanding of transmission risks across a financial system that has grown ever larger and more complex in recent years” he said.

“ It’s also recognition of the growing systemic importance of superannuation, as well as the emergence of new financial sectors: private credit, crypto, alternative payment platforms and digital wallets.”

For this first test, we APRA has decided to focus on links between the two giants of the Australian financial system: a banking industry holding more than $6 trillion in total assets and a superannuation industry with almost $4 trillion in funds under management. 

“Specifically, we intend to explore the extent to which the superannuation system may dampen or amplify stress across the financial system” Lonsdale said.

The four potential risk transmission channels APRA said it was most interested in are:

•    the impact of a crisis on superannuation fund liquidity and how trustees might respond to any shortfalls;

•    the impact on banks’ liquidity due to large outflows from institutional counterparties;

•    banks’ ability to rely on superannuation as a source of capital in time of stress; 

•    and the impact of asset markets from banks’ and superannuation trustees’ synchronised responses to the stress.

APRA said it remains in consultation with industry on the design of the test and the scenario it models. 

“We anticipate that it will involve a major financial market shock of some sort, a series of secondary shocks that erode bank capital and superannuation member contributions, compounded by an operational risk component that disrupts entities’ ability to respond to the financial challenges.”