‘Vigilant’ APRA watching excessive risk-taking
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


‘Vigilant’ APRA watching excessive risk-taking
ID logo
promoted stories


Matt Spence

UniSuper recruits Merill Lynch analysts

Staff Reporter

Robert Brown

ACSA hires former director as CEO

Staff Reporter

Sudhanshu Garg

AMP Capital appoints director in Dubai

Staff Reporter


investordaily image

Getting on board the ‘grey nomad’ caravan

Nick Griffin

investordaily image

What’s next after Xi consolidates power?

Eric Moffett

investordaily image

How the NPP will transform investing

Simon Wunder