APRA Chair highlights climate change, cyber risk and governance issues as sector’s biggest threats

Unpreparedness is the biggest risk financial institutions face from climate change, Australian Prudential Regulation Authority (APRA) Chair Wayne Byres told a CEDA event in Sydney.

Speaking in the week after APRA released a draft prudential practice guide to help banks, insurers and funds manage climate change, Mr Byres said it carries “long-term and unprecedented risk” for the industry.

“Understanding where and how climate risks will impact on the financial sector is not easy,” he told the event, “and if you want a good example of that, think about dust storms in the Suez Canal.

“I don’t think many people were thinking about that as a risk.  

“There’s a deficit of data on how the risks will unfold, in what areas and over what timeframe.

“Those risks aren’t just the physical risks of a changing climate, but also, importantly, government policy changes occurring around the world, which are changing, in turn, the dynamics of economies and industries, as well as changing investor demands and changing community expectations.”

APRA’s draft guidelines do not tell financial institutions where to invest, he said, but “emphasise that climate considerations need to be part of any decision-making process if financial institutions want to make well-informed decisions.”

While noting that managing those risks was “easier said than done”, he also said that climate change brought with it plenty of business opportunities as the economy transitions to net zero.

“It’s not all about the downside,” he said.

Governance and cyber risks also a priority 

Mr Byres also addressed the risks posed by poor governance and cyber attacks, which are among the new supervisory and policy priorities published by APRA at the beginning of the year.

“We remain of the view that systemic weaknesses in governance, culture, remuneration and accountability are often the root cause of problems that crystallise into significant, unexpected and damaging losses,” he said.

He called cyber risk the “most difficult prudential threat” of the topics covered in his speech, because “unlike issues around culture and unlike climate risks, it’s actually driven by malicious and adaptive adversaries who are intent on causing damage.

“Cyclones and bushfires can obviously be devastating, but they don’t do it on purpose.”

He said APRA was making renewed efforts in this area, now that the impact of COVID-19 was subsiding.

“The eruption of a crisis doesn’t mean a whole raft of other issues go away, and now the economic recovery is underway, it is important that we start to look a little bit more broadly again.

"It would be a very cruel irony for a financial institution to come through the deepest economic crisis in a century only to get caught unprepared for risks that they had ample warning about and should have seen coming."

No mandate for safety at all costs

When asked if its regulations were “too robust” and constrained lending at a time when the economy needed a boost, he replied that APRA does not have “a safety at all costs mandate”.

“We have a mandate that parliament has given us that says balance safety with competition,” he said, noting that economies with the strongest underlying financial systems had coped best throughout the pandemic.

“The strength of the financial system allowed it to play a really important and critical role in supporting the Australian community through a very difficult period.

“You don’t want to be caught short the next time a crisis comes … You want to be really confident that there isn’t a shock coming tomorrow – and I don’t know how you could confidently say that.”

“The issue for us is not house prices"

Mr Byres was also asked if accelerating house prices would prompt macroprudential intervention from APRA.

“The issue for us is not house prices,” he replied. “For us, they’re a risk factor, they’re not an outcome, they’re not a goal.

“I’ve said this many times, but APRA doesn’t have a mandate to set house prices or target a level of houses prices.

“It’s an important issue, but as a prudential regulator, it’s not our job to solve affordability challenges. The government deals with those issues.

“For us, the question is what’s the risk to the financial system. How could risks in the environment we are in manifest in risks and instability in the financial system?

“For the most part, that happens when lending standards become poor, become weak, and there’s excessive risk-taking in the system.

“Up to now, we don’t see that. Banks have done a pretty good job in holding lending standards up.”