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Executive Director Policy and Advice Division Renée Roberts - Speech to Risk Management Institute of Australasia Annual Conference 2022

Thursday 31 March 2022

Failing to plan is a plan to fail


Good afternoon everyone. It’s a pleasure to be here in the flesh and see so many faces. 

In December, APRA released a consultation package on crisis preparedness. Everyone in this room is familiar with the need to prepare for crisis tail risks – we’ve all just lived through a significant tail risk event for the last few years. It is a brave person in 2022 that says “I’m not worried about the 1 in 100 risk”, so I don’t think there is any need for me to beat on that particular drum! 

I want to start instead by focusing on a less obvious benefit of crisis preparedness – how preparing for failure enables us to have a financial system which has space for appropriate risk taking. Enabling the right types of risk can deliver substantial innovation and efficiency. Cast your mind back a few months to the Winter Olympics, and the scored competitions like figure skating or freestyle skiing. These sports show the delicate balance between risk and reward. They demonstrate the efficacy of a rule-based environment which encourages risk-taking but prohibits catastrophic risk. Athletes in these competitions are incentivised to constantly push the boundaries of physical achievement and aesthetic innovation. Competitors can produce a solid score by pulling off familiar moves that are tried and tested, but the gold winning performance will usually go to an athlete pushing to the very edge of what’s possible. These performances are the ones that stay with us, and inspire the next generation of risk-takers. But operating this close to the edge comes with risk – the potential for failure when performing at this level is a breath on the back of the neck or a fraction of a millisecond.

This analogy underlines the complex risk dilemma APRA faces as financial safety regulator. Australia needs a financial system that harnesses the creative power of risk-taking, and the innovation and efficiencies derived from risk taking. On the other hand, it cannot have a system that is brittle and overly prone to failure – particularly catastrophic failure. In other words, we want our competitors to test the boundaries of what is possible, but without risking or causing serious injury or death. Failure always involves pain and cost, but that cost must be acceptable. All participants need confidence that that the system can survive shocks. I want to take you inside how APRA balances this difficult trade-off.

The supervisory and resolution continuum


Our first line of defence is the one with which most of you will be familiar – through supervising and mitigating risk in the system. This is APRA’s role as prudential supervisor. In this role, APRA seeks to prudently temper risk-taking behaviour. We achieve this through policy settings that encourage appropriate risk management and through capital settings that are risk sensitive. It is also achieved through close supervision of our regulated population, providing boards and management an external perspective on prudent risk management. Through these disciplines, APRA is seeking to reduce the probability of an APRA-regulated institution failing.

APRA’s goal to reduce the probability of failure should not be confused with an attempt to eliminate failure. A system with no risk of failure does not create sufficient space for the upside of risk-taking behaviour. This is why we frequently remind stakeholders that APRA does not run a ‘zero failure’ regime. 

So, if we operate in a system that accepts a risk of failure, what does APRA do when a regulated entity does fail? This question leads us to APRA’s much less familiar second line of defence, APRA’s role as resolution authority. In this role, APRA seeks to ensure that any failures that do occur will be orderly failures. An orderly failure is one where a regulated entity hasn’t reached its intended destination, but where the entitlements of protected beneficiaries and the stability of the financial system remain intact. The classic example is the “successful failure” of Apollo 13 – the mission that failed in its attempt to land on the Moon but returned its astronauts safely to Earth. As resolution authority, APRA seeks to reduce the impact of failure by ensuring failures are orderly. The 2014 Financial System Inquiry emphasised the importance of this role. Recommendation 5 of the FSI recognised the need for APRA to have effective crisis management powers – the Government legislated these powers in 2018. Recommendation 3 set out the importance of having available loss absorbing and recapitalisation capacity in order to minimise taxpayer support in the unlikely event of failure.  

It is worth spending some time examining this concept of “orderly failure” as it lies at the heart of what APRA seeks to achieve as a resolution authority. The first thing to bear in mind is that not everyone wins in an orderly failure – failure always involves costs to stakeholders in a regulated institution. This is particularly true of shareholders and providers of capital – it is appropriate that those who had the most to gain, were the venture to be successful, bear the brunt of failure. However, the cost of failure can also extend to other stakeholders such as employees and third-party service providers. Whilst APRA is sympathetic to the difficulties faced by all stakeholders and will seek to implement a resolution that minimises negative outcomes, this should not be confused with our fundamental objective to ensure financial system stability and to safeguard the entitlements of protected beneficiaries (depositors, policyholders and superannuation members). APRA’s role is conceptually similar to the role of an insolvency practitioner but with a different objective – an insolvency practitioner manages a failed entity in the interests of its creditors, APRA manages a failed or failing entity in the interests of its protected beneficiaries and the financial system.

There are three critical points I want stakeholders in APRA-regulated institutions to be aware of when thinking about failure:

  • First, resolution action by APRA is likely to occur prior to ordinary insolvency at what APRA describes as the “point of non-viability” – the point at which APRA believes it is compelled to intervene to ensure resolution is orderly.
  • Second, resolution is not ordinary insolvency. Resolution prioritises achieving APRA’s objectives (protecting beneficiaries and the financial system). Our focus is not the same as the ordinary insolvency practitioner who seeks to maximise creditor return. A failed or failing entity will only be allowed to proceed to ordinary insolvency or restored to shareholders once APRA has achieved its objectives. 
  • Third, APRA’s goal is to do all it can to make sure that public funds are not necessary to achieve an orderly resolution. Whilst public funds may be used as a last resort, this should not be confused with a presumptive path for a failing APRA institution.

Financial contingency planning – an institution-led approach


APRA’s consultation package introduced two new draft standards – CPS 190 Financial Contingency Planning and CPS 900 Resolution Planning – standards that are closely related yet critically different. 

CPS 190 represents the last bastion of APRA’s supervisory approach to reduce the probability of failure – it requires APRA-regulated institutions to contemplate the sort of severe financial stress scenarios that may threaten their viability, and then to put in place a financial contingency plan in order to successfully navigate these scenarios.

When I think of financial contingency planning, my mind turns to the famous “miracle on the Hudson”. For those unfamiliar, this was an aircraft emergency in which the pilot, Captain Chesley “Sully” Sullenberger, was able to land a passenger jet on the Hudson River in New York following a bird strike that disabled both engines. For those of you who haven’t seen the dramatization of these events in the film Sully – what are you waiting for? You work in risk management so it’s right up your alley! 

For those that have seen the film, you will no doubt recall the consummate professionalism with which the pilots execute their crisis response in the 90 seconds from bird strike to water landing. They methodically work through their checklist – attempting to restart the engines, then seeking to glide to an airfield, before finally settling on the only option available, a river landing which they perfectly executed. All of this is done calmly and precisely despite the very real risk of personal catastrophe. Thankfully, none of the 90 seconds is wasted in indecision, as even a moment’s hesitation could have led to disaster. 

The precision with which the pilots resolved this crisis was no accident – it was the consequence of exhaustive training and preparedness. They weren’t coming up with it on the spot, they had heavily invested in preparedness for this highly unlikely event. 

The failure of an APRA-regulated institution may not be a matter of life and death, but we have our own weighty responsibility – the financial wellbeing of the Australian community and the trust they place in APRA-regulated institutions. It falls on the leaders of our institutions to be as prepared as these pilots were. Making it up on the spot or coming up with a plan and putting it on the shelf don’t cut it. We need leaders to face into this challenge, not view it as a compliance exercise. Leaders need to have thought seriously about financial stress scenarios, come up with a credible plan, and then tested their institution’s ability to execute this plan. If you are going to step up to the controls of one of our institutions, it is your responsibility to assure yourself that you can land it safely in the unlikely event of an emergency. 

A financial contingency plan is required to contemplate both recovery and exit options.

Recovery refers to the institution’s capability – in a stressed environment – to execute actions like raising funds or reducing expenses. Recovery actions seek to ensure the entity navigates the stress and returns to business as usual. 

Exit refers to the regulated institution leaving APRA’s regulated perimeter. This ordinarily occurs by way of acquisition, merger, transfer or a form of solvent wind-down such as run-off in insurance. Financial contingency plans are the regulated institution’s own plan to extricate itself from financial stress. For the avoidance of doubt: relying on APRA or Government to intervene to solve the problem is not an adequate contingency plan. 

Whilst CPS 190 requires entities to contemplate both recovery and exit, APRA is aware that these options aren’t equally viable for all institutions across all industries. Given their structure, mutual ADIs, for example, are less likely to have a comprehensive menu of options to raise funds in financial distress, and will be more likely to emphasise preparedness for orderly exit. On the other hand, the exit pathway of the largest and most complex institutions is very narrow, so they are more likely to emphasise preparedness for recovery. APRA is establishing minimum expectations and requiring institutions to take control of this critical responsibility. The minimum expectations can be summarised as follows:

  • contemplate likely financial stress scenarios ahead of time;
  • prepare a flexible and credible response that has considered the role of both recovery and exit, and is integrated into your risk management practices;
  • ensure you have the capabilities and financial resources prepared and/or hypothecated to execute your response; and
  • review your plan and associated capabilities regularly.

APRA is agnostic as to how these objectives are achieved by institutions, but in the course of supervising CPS 190 APRA will form views of what represents better practice and communicate this to institutions via the supervisory process. Practices will naturally differ both between industries and with reference to the varying size and complexity of regulated institutions. The complexity of the obligations in our principles-based framework adapt in recognition of this. 

The essence of financial contingency planning is our expectation that institutions must be ready to manage their own destiny in all reasonable circumstances. Boards of APRA-regulated institutions must be aware that it simply isn’t acceptable to rely on ordinary insolvency or APRA stepping in to solve the problem. This involves painful trade-offs for institutions – particularly when contemplating an exit – but an institution that executes its own departure will almost always be in a better position to look after the interests of all its stakeholders when compared to an APRA-led resolution. 

Resolution planning – an APRA led back-up


It remains possible that – despite an institution’s best efforts – APRA must intervene to ensure an orderly failure. This is almost always a second-best option, but one that we must be ready to execute. APRA’s regulated institutions – particularly our largest and most complex institutions – are so essential to the financial well-being of the Australian community that we must have a back-up plan in place.

CPS 900 Resolution Planning is our tool for preparing an APRA-led resolution. Like CPS 190, CPS 900 is concerned with successfully navigating a crisis, but unlike CPS 190, CPS 900 focuses on what happens post failure. CPS 900 only applies to Significant Financial Institutions or institutions that perform critical functions – institutions that by their nature demand a higher level of APRA readiness for failure. 

This standard is unlike any other APRA prudential standard. APRA’s standards ordinarily impose a set of obligations for entities to consider and integrate in the running of their business. By contrast, CPS 900 is a toolkit to help APRA prepare its own plan. It essentially contains two key obligations for regulated institutions:

  • support APRA when APRA conducts resolution planning; and
  • when APRA puts in place a Resolution Plan (APRA’s plan), maintain the resources and capabilities necessary to execute this plan

Resolution planning in Australia is in its early stages. This standard is the start of a journey between APRA, industry and expert advisers to develop capabilities together and to deepen understanding of APRA’s post-failure expectations. We don’t pretend to have all the answers across all industries and cohorts – resolution planning is a complex, in-depth, multi-year process, and is sensitive to the peculiarities of particular institutions. 

What I can set out for you today is APRA’s core expectations and basic philosophy. Following resolution planning, APRA expects to have high confidence that were failure to occur, that failure will be orderly. It seeks to achieve this with minimum “peacetime” cost and disruption to the institution, but acknowledges that cost and disruption may occur. The fact that readiness may involve additional peacetime cost and disruption at an institution is no justification for transferring this burden to the public purse in resolution. Suffice to say, we have not forgotten the lessons of the global financial crisis. Whilst the Australian financial system navigated that crisis relatively comfortably, past performance is not a reliable indicator of future performance. APRA’s largest regulated institutions occupy a highly privileged position, and adequate preparedness for resolution is a responsibility that flows from this privilege.

A final note on resolution planning – as an APRA-led exercise, CPS 900 only takes meaningful effect for an institution when APRA informs it that APRA is commencing resolution planning for that particular institution. Whilst resolution planning is a time intensive exercise, it is intended to be an infrequent one. Once a resolution plan is in place, the institution has to retain readiness to execute this plan. Where an entity has maintained an appropriate standard of readiness, APRA would only need to re-commence resolution planning with that institution if there were significant changes to its business or structure. Given the resource intensity involved in resolution planning, it is likely that APRA will only be able to maintain a handful of resolution planning exercises annually across all industries, and some of these exercises will be multi-year exercises. This will substantially reduce the expected regulatory burden.   

Modernising the prudential architecture


Our work on crisis preparedness is just one part of APRA’s broad and ambitious agenda to protect and safeguard the financial system. APRA’s Corporate Plan, released in 2021, sets our strategic direction for the next few years, and has the theme of ‘protected today, prepared for tomorrow’. Building on this, at the beginning of February we released our policy priorities for the year ahead. 

While we continue to focus on ensuring financial stability in the face of the pandemic and completing a number of key reforms that were started in 2021 including bank and insurance capital, requirements for strategic planning and member outcomes in superannuation, I would like to touch on a key strategic priority: modernising our prudential architecture.

As you can see in our policy priorities, we have a broad work agenda. This includes addressing new risks that have emerged or are emerging, adapting international standards for Australian conditions and to respond to new tasks given to us by Government. APRA has traditionally approached this by adding to the rulebook.  Across the industries we regulate, there are over 150 prudential standards and practice guides. On top of this, there are many more letters to industry, FAQs and other material. The rulebook has become more complex in line with a growing and ever-changing financial system. It is clear we need to revise the prudential architecture that has existed since our establishment over 20 years ago. To prepare for tomorrow, we need to change now. 

APRA has started a program of work to modernise our architecture for a digital world. This will look to adapt our prudential rulebook and our approach as new risks evolve, innovation accelerates and business models change. The ultimate goal is to build a modern and adaptable prudential framework that provides a platform to maintain system stability and support innovation in a changing environment.

Over the next few years, we will be making our prudential framework more accessible for industry, more aligned to the needs of the users, and more adaptable to respond to changes in the external environment. 

This is a long program of work, and we are just getting started. We will be looking to work closely with industry and risk professionals such as yourselves for feedback and ideas. It’s APRA’s prudential architecture, but you have to work with it. As risk professionals, we are committed to making sure our financial system remains resilient and continues to support the prosperity of all Australians. Watch this space.

Closing remarks


In closing, APRA is focused on protecting today and being prepared for tomorrow. What you have heard from me today is that:

  • crisis preparedness to ensure failures are orderly is everyone’s responsibility;
  • we will continue to ensure financial stability as we recover from the pandemic and complete a number of key reforms; and
  • we have commenced a program of work to modernise the prudential architecture and are looking forward to engaging more with industry as this work progresses.

Our ultimate goal is not to eliminate risk from the financial system. The power of appropriately managed risk enables innovation, competition, improvements in efficiency, jobs and economic growth. But just as Olympic authorities prohibit manoeuvres that have an outsized danger of death or critical injury, APRA also sets parameters for acceptable failure. Entities must have an appropriate level of readiness for failure, and in the unlikely event of the failure of our most critical institutions, that failure must be orderly and beneficiaries’ entitlements must be kept safe. 


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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.