The regulator is moving the prudential goalposts for banks, insurers and superannuation trustees.
The Australian Prudential Regulation Authority (APRA) is looking to protect the financial sector against crises and shocks with new loss-absorption requirements and proposed planning standards.
APRA deputy chair John Lonsdale said that crisis preparedness sat at the very heart of APRA’s purpose as a regulator within the financial services sector.
“Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties.
“Should that happen, we want to be sure each entity has the capability to either recover or manage an orderly exit with the smallest possible impact on the community and the financial system,” he said.
The first of the two new crisis-preparedness measures that APRA is looking to introduce (CPS 190) will require all APRA-regulated banks, insurers and super funds to have plans detailing how they intend to respond to financial stresses.
“APRA-regulated entities have made substantial improvements in contingency planning over recent years, however, there remain large gaps in capabilities between entities and across industries,” Mr Lonsdale said.
While smaller entities will be subject to some of these requirements, APRA said that adjustments and exceptions will be made in accordance with the size, complexity and business model of the entity in question.
The second measure that APRA has proposed will require complex APRA-regulated entities to take pre-emptive actions designed to assist regulators in the event that they collapse.
“By laying out a consistent, transparent and enforceable framework, APRA will be better able to strengthen crisis preparedness and close those gaps,” Mr Lonsdale said.
The regulator is now looking to enter industry consultation on the above two measures, with a tentative enforcement date of 1 January 2024 in mind.
In addition to the above, APRA has also moved to finalise new requirements for Australia’s big four banks.
This will require ANZ, CBA, Westpac and NAB to increase their loss-absorbing capacity from 3 per cent of risk weighted assets to 4.5 per cent.
Through this adjustment, APRA said that it hopes to make the possibility of recapitalising a major bank via a large pool of private funds more feasible than doing so using public money.
“Crisis preparedness and resolution planning gets to the very heart of APRA’s purpose to protect the financial interests of bank depositors, insurance policyholders and superannuation members,” Ms Lonsdale said.