Latest News:

‘Vigilant’ APRA watching excessive risk-taking

APRA has issued a warning to financial organisations that are gradually ramping up risk to compensate for below-average profits.


Speaking at Finsia’s The Regulators conference in Melbourne on Friday, APRA chairman Wayne Byres said the low interest rate environment is putting pressure on organisations to increase returns.

System-wide profitability for APRA-regulated organisations was below its 10-year average for the 2015-16 financial year, Mr Byres said.

While Australian institutions aren’t yet faced with negative interest rates, pressure is growing to join the "hunt for yield" by moving up the risk spectrum, he said.

“To date, we have not seen major shifts in asset portfolios designed to bolster returns by accepting materially greater risk,” Mr Byres said.

“That doesn’t mean that risk-seeking isn’t happening at the margins however, and it is at the margins where we need to be most vigilant,” he said.

APRA-regulated organisations are unlikely to “roll the dice” and immediately ramp up risk in their portfolios, Mr Byres said – rather, it is more likely to be a gradual process.

“Like the anecdote about the frog in boiling water, there is a danger no one notices the ever-increasing risk profile until it is too late,” he said.

This situation can be avoided so long as financial institutions have an appropriate "risk culture" in place, Mr Byres said.

“Just as the frog is said to be oblivious of the dangers of the gradually warming water, an organisation with a poor risk culture will be oblivious, if not neglectful, of its gradually rising risk profile,” he said.

“Group risk insurance and mortgage lending standards are two examples that reinforce the need for a strong risk culture at a time when a little more risk might well be a tempting way of dealing with otherwise subdued returns.

“This temptation can be even harder to resist when competitors appear to be doing likewise – even though that is the weakest justification of all.

“Our best protection against becoming boiled frogs will not be regulatory reforms such as those emanating from [the] Basel [Committee], but a strong risk culture within financial institutions that gives appropriate weight to both sides of the risk-return trade-off.”

Read more:

New boss for IOOF dealer group

Australians in the dark on super tax changes

Take a 'balanced view' on Trump win

Blue Sky completes $47m capital raise

Industry failing on gender diversity: CFA

 

promoted stories

Appointments

Tom Garcia, AIST, Eva Scheerlinck

Staff Reporter

Insyn Funds Management, Monik Kotecha, John Lobb, Global Titans, portfolio management, equity investment, global equity

Staff Reporter

Mark Beardow, AMP Capital, Adam Tindall, AMP

Tim Stewart

Analysis

Simon Shields, Monash Investors, goals based advice, wealth management, global financial crisis, investment management, ausbiz

Simon Shields

Sequential, Ruth Keaney, insurance, insurance claims, underwriting, Financial Services Council, FSC Guidance Note 33, SPS 250, APRA

Ruth Keaney

ASIC, fintech regulation, Airwallex, Jack Zhang, fintech law, innovation, financial services,

Jack Zhang

fa-twitter