APRA publishes John Lonsdale's remarks to the 2026 AFR Banking Summit

Severe and here

Key points

Good morning and thank you for inviting me to address you once again.

This is the fourth time I have spoken at this event and the third time these remarks have fallen in the shadow of significant global events impacting our financial system. In 2023, it was the international banking turmoil sparked by the collapse of Silicon Valley Bank. Last year, it was America’s “Liberation Day” tariffs, which roiled financial markets and threatened a retaliatory trade war. Today, it’s the joint military operation against Iran, which led to attacks on countries across the Middle East and Europe and severely disrupted global trade.

The impacts of the conflict on our economy have been immediate, as anyone who’s filled up their car with petrol recently could attest. The rising cost of fuel will likely push up the cost of goods and services across the economy, increasing cost-of-living challenges and complicating the Reserve Bank’s efforts to fight inflation. The Government has already flagged that the economic fallout from this war will have consequences for May’s Budget.

At times like these, it’s important to reassure the public about the strength and stability of our financial system. But it’s also important to remind people that this resilience is a product of good management, not good fortune. In fact, certain features of Australia’s geography, economy and financial system actually leave us vulnerable to global shocks: a banking system reliant on overseas markets for funding; a trade-exposed, open economy; a relatively small population by global standards; a concentrated banking industry that is uniquely exposed among comparable countries to residential mortgages; and a superannuation sector with billions of dollars of members’ savings invested overseas.

It’s for those reasons that 2014’s Financial System Inquiry report recommended our banking system hold “unquestionably strong” levels of capital, something that took effect from 2020 after years of building up that strength. This capital strength is a key reason why APRA is confident our banking system will be able to continue providing critical services to support customers and the economy throughout this period of turbulence.

Capital is the cornerstone of a bank’s financial resilience, but liquidity is just as important, especially in a crisis when banks may need to rapidly source funds to meet cash demand from deposits, debt and other cash outflows. Although Australia’s bank liquidity regime is adequate, our regime has not kept pace with international peers.

That is about to change. Today I will be announcing plans to strengthen our framework with an uplift for the largest banks to bring their liquidity frameworks more in line with international practice. For smaller banks, we are proposing changes that should marginally reduce liquidity costs for entities with stable funding profiles.

We are also proposing several measures to ease the regulatory burden for banks. These include making targeted changes to risk weights for some forms of corporate lending that increase risk sensitivity, which we expect to support lending and investment. Collectively, we expect this package of reforms would be broadly cost neutral across the banking system. Crucially, we believe these adjustments will ensure we maintain financial system resilience and remain well prepared for future crises.

Crisis response

Before outlining the details of our consultation package, I want to talk a bit more about the current global economic turmoil and how APRA is responding.

There is no doubt this is a troubling time in world affairs for reasons that go well beyond share prices, bond yields and the cost of petrol. The risk of a drawn-out war or further escalation that would worsen the economic fallout is real and something we must be prepared for.

As a prudential regulator, when market stress events arise, our attention from a banking perspective is immediately drawn towards the core financial risk considerations. First and foremost, funding and liquidity come into sharp focus. Liquidity can have the fastest impact on bank solvency and overall system confidence.

Next we consider capital. Capital considerations are most often considered through credit portfolio implications – potential exposures to problematic counterparties, impacted regions of the world and industries that might experience higher impact. Capital impacts can also be seen from market risk exposures held by banks.

With this in mind, at times of stress APRA more closely engages with banks, applying elevated scrutiny on their liquidity, credit and market risk. We also speak to banks to gain intelligence, as well as liaising closely with our counterparts on the Council of Financial Regulators (CFR).

This is exactly what has been happening over the past fortnight. Beyond the immediate market impacts, we are also reminding regulated entities to remain alert to non-financial risks including the potential for elevated cyber activity and impacts on operational resilience.

Global context

While we will continue to monitor developments closely, we expect our financial system to remain strong and stable through this volatile period. We are not, however, complacent. As a proactive, risk-based regulator, we are constantly assessing our settings to ensure they remain fit-for-purpose as the operating environment evolves.

It’s in this context that APRA recently examined its bank capital and liquidity settings. In the case of liquidity, we have been flagging for some time that an update is imminent given that APS 210 Liquidity is more than a decade old. With regards to capital, some reflection seemed timely as we reached the five-year mark since finalising our “unquestionably strong” framework.

A lot is happening on global regulation. The US is expected to release revised “Basel endgame” proposals shortly, and the Federal Reserve said in a speech last week it expected it would result in a small reduction in capital requirements for American banks¹. The European Commission has just launched a targeted consultation on the competitiveness of the EU banking sector². Several other jurisdictions announced reviews or implemented changes to bank capital rules, including NZ, Canada and the UK.

While comparisons with regulations in other jurisdictions are natural, the key point I would make is that Australia needs a prudential framework designed for Australia’s banking system and its unique characteristics. We don’t have the same domestic savings pool as the US, Europe or much of Asia to enable our banking system to source its funding internally. That leaves us vulnerable to a crisis that impacts global funding markets. The major Australian banks generally don’t compete internationally, which means capital requirements have more limited impacts on our banks’ competitiveness compared with overseas peers.

We are also looking closely at economic or geopolitical threats to the Australian financial system. The potential for further geopolitical shocks is real while economically, the risk environment remains heightened – not only in relation to Iran but also eastern Europe and the Asia-Pacific. To strengthen resilience in this global context, APRA and other CFR agencies are increasing expectations on entities with heightened exposure to geopolitical risk to prepare for a range of plausible scenarios. This work is focused on ensuring they are responding strategically to the evolving global context and increasing focus on non-traditional risks that are amplified by geopolitical risk. This includes risks such as foreign interference, as well as testing practical readiness to respond to events that cut across traditional financial and non-financial risk classes.

For example, as part of a joint credit risk and geopolitical risk review of the largest banks last year, APRA ran a fire-drill exercise on a hypothetical Middle Eastern crisis. The goal was to test banks’ ability to get a quick understanding of the direct and indirect impacts. It confirmed Australian banks have a relatively small direct credit exposure to Middle Eastern countries and in their view, relatively modest impacts to capital and provisioning. Recent events have reinforced the urgency of this type of work and the importance of sharp and sustained focus by entities.

On liquidity

As the global environment deteriorates and becomes more uncertain, Australia’s vulnerability to these developments means “unquestionably strong” capital is unquestionably essential. But we also need to do better on liquidity. When Silicon Valley Bank collapsed in 2023 sparking a major period of global bank turmoil, it was a lack of liquidity, not capital, that sealed its fate. More recently, the findings of APRA’s inaugural System Risk Stress Test demonstrated that severe liquidity stresses can emerge suddenly and from a range of sources, including links with the superannuation sector.

While larger Australian banks have strengthened their liquidity resilience considerably over the past decade, they are exposed to several significant risks that could rapidly consume their liquidity buffers in stress. They are carrying material “cliff risk” given the term deposits that sit just outside the Liquidity Coverage Ratio (LCR) 30-day horizon, for example. Likewise, intraday payment obligations would likely consume a substantial amount of liquidity in a crisis, as seen in Credit Suisse’s failure.

Large banks overseas are more advanced in addressing the types of vulnerabilities that aren’t captured by minimum requirements. Larger Australian banks’ operational capabilities also lag their peers in several critical areas, including the coverage and timeliness of their liquidity risk monitoring. For small banks, they have not been incentivised to rely on more stable funding sources given our simplified Minimum Liquidity Holdings framework is not risk sensitive.

Through our supervisory engagements since 2023’s SVB collapse, we’ve endeavoured to uplift a number of structural and operational aspects of liquidity risk management across Australian banks. We’ve worked to strengthen diversification practices, with institutions exhibiting more pronounced concentrations receiving heightened supervisory attention. Uplifting intraday liquidity risk management has been another area of supervisory focus. But there is only so much we can achieve through supervisory suasion. We need to tighten the legally binding prudential standard.

We are now preparing to consult on a package of changes that strikes a balance between stability, efficiency and competition while aligning our framework more closely with international practice. For large banks, our proposals focus on addressing gaps in risk management practices and ensuring sufficient liquidity is held against risks not captured by minimum requirements. Impacts for medium-sized banks will be lower reflecting our proportionate approach. We also plan to broaden the universe of liquid assets for Liquidity Coverage Ratio banks, such as by including covered bonds (subject to ceilings and haircuts), which will help limit the cost associated with improved liquidity resilience.

Expanding the universe of liquid assets will also support increased diversification. For small banks, we think simple changes could improve risk-sensitivity and incentivise better risk management. The changes will reward small banks that rely on stable funding by letting them hold fewer liquid assets, helping reduce costs. We’re also planning to create a more even playing field for industry by setting a transparent limit on the use of lower quality liquid assets.

On capital

The second part of the package of reforms we are announcing relates to capital. For the reasons outlined today, we remain committed to upholding our unquestionably strong capital framework, but that doesn’t mean there is no room for recalibration. APRA monitors the calibration of its capital settings on an ongoing basis. A review over the past 12 months has identified an opportunity for narrowly targeted measures to reduce the regulatory burden on banks and support productivity, while maintaining the strength of the banking system.

Our assessment in banking is that there are now some areas of corporate lending where standardised risk weights overstate the riskiness of exposures and can be lowered without undermining resilience. While upholding our continued commitment to unquestionably strong settings, we intend to consult on recalibrating certain risk-weights or introducing new risk-weight categories to more accurately align requirements with underlying risk. We expect this will include lending for infrastructure, unrated corporates and land acquisition, development and construction. APRA expects the changes to give larger entities more flexibility to provide lending and support investment under the standardised floor without compromising stability.

This initiative is in addition to already announced plans related to capital stemming from the Council of Financial Regulators’ Review of Small and Medium Sized Banks. We have committed to increase the transparency of Pillar 2 capital adjustments and introduce a third tier in our prudential framework as part of our proportionality agenda. We highlighted how supervisory capital adjustments – or “Pillar 2” capital requirements – for the smallest banks could be lowered to reflect their less systemic nature if crisis management arrangements are strengthened. We have also proposed a simpler pathway for IRB accreditation, which has the potential to lower capital requirements for medium-sized banks in return for improved risk management.

On FRTB

The final part of the capital and liquidity package we intend to consult on concerns the Fundamental Review of the Trading Book (FRTB).

Although Australia is generally Basel III compliant, we believe in a framework tailored to Australia’s unique circumstances and the characteristics of our local industry. That means we are super-equivalent in some areas but we also simplify Basel’s rules where appropriate. It’s why we have a simple securitisation framework. Lessons from the GFC suggest risks from complex and opaque forms of securitisations, such as synthetic risk transfers, may not be apparent until the onset of significant stress.

Another example is the FRTB. After delaying implementation of FRTB for several years because of its lower importance to the Australian market, we are now ready to progress a simpler version designed for Australian conditions. This recognises that traded market risk comprises a relatively small share of Australian banks’ risk-weighted assets and that APRA has already addressed several risks covered by FRTB. Our approach will deliver similar risk management outcomes to the full version but at a meaningfully lower compliance cost.

A balanced approach

Later today, banks will receive a letter from APRA laying out our consultation roadmap for this package of changes. Our intention is to consult on the three aspects of the package – liquidity, capital and FRTB – separately, starting with capital in the first half of this year.

We recognise that what we’re proposing on liquidity will be a step-up in requirements for some banks. But when the package is viewed holistically, we expect it to be broadly cost neutral across the banking system. Furthermore, given APRA’s focus on proportionality, we would expect some cost reductions for smaller banks, with only a small minority with weaker liquidity positions incurring costs.

A more contested proposition is what impact the changes will have on lending, business investment and productivity. Although liquidity resilience sometimes can be seen as a cost to efficiency, a liquidity crisis can cause far greater and longer-lasting damage to productivity. When liquidity dries up, credit contracts and investment slows. Strengthening resilience reduces these risks and supports more efficient capital allocation over time.

Theoretically, building more risk sensitivity that lowers the amount of capital banks needs to hold against business loans should enable them   to lend more on their existing capital. By lowering the cost of credit for businesses, there is the potential to encourage investment, with benefits for productivity and economic growth.

We can do our part in making our capital requirements more risk sensitive, but it is ultimately up to banks to channel these savings into productive purposes. If banks choose instead to pocket the money or return it to shareholders, an opportunity to meaningfully improve national productivity will be missed.

Real life stress test

When APRA designs its annual bank stress test, our “severe but plausible” scenario often features a significant geopolitical shock that triggers a global economic downturn. This, in turn, transmits to Australia through sharp falls in trade and commodity prices.

While the severity of the current Middle East conflict remains to be determined, this long-anticipated geopolitical risk is no longer just plausible – it’s happening. Severe and here.

When past major shocks have buffeted the Australian financial system, our institutions and system have stood strong. We weathered the GFC without the devastating bank failures, home loan foreclosures or unemployment spikes that plagued so many countries. Our financial system was able to extend support to borrowers and superannuation members during COVID. This history may give us confidence in the ability of our banking system to withstand this latest shock, but it can’t fuel complacency.

Remaining “protected today” requires us to arm ourselves with intelligence. APRA will continue to closely monitor how the war is impacting our financial system and try to anticipate where future risks may emerge. We will keep liaising with banks, peer regulators and Government to share those insights and keep the system strong.

Ensuring we are “prepared for tomorrow” also requires action. Just as the resilience of our system is the deliberate outcome of policy decisions over many years, we must constantly reassess those settings as the environment evolves and make adjustments when needed.

At a time of heightened global uncertainty that could deteriorate further, the proposed changes to liquidity and capital settings I’ve outlined today – tighter liquidity requirements, more risk sensitivity to ease capital – strike the right balance between improving efficiency and retaining resilience. They are settings that recognise the characteristics of our financial system and the conditions it faces – and will ensure our banking system remains unquestionably strong, robustly liquid and supported by a regulatory framework that is unquestionably designed for Australian conditions.

Footnotes
 

¹Speech by Vice Chair for Supervision Bowman on Basel III and bank capital rules - Federal Reserve Board

²https://finance.ec.europa.eu/news/commission-launches-public-consultation-eu-banking-2026-02-11_en