Wayne Byres, Chairman - House of Representatives Standing Committee on Economics, Canberra
As an independent statutory agency, APRA takes seriously the need to explain and be accountable for what we do. We are therefore very happy to have been invited here today to discuss APRA’s 2013 Annual Report, and our activities more generally. Given this is APRA’s first appearance before this Committee for some time, and my first appearance since taking over as APRA Chair at the start of this month, I would like to make an opening statement covering:
- APRA’s general approach to prudential regulation and supervision;
- the major policy reforms that dominated our work agenda in 2013; and
- the current state of the Australian financial sector.
Hopefully it will be a useful scene-setter for the rest of our discussion this morning.
Let me start with APRA’s approach to fulfilling its mandate. Our purpose, as set out in the APRA Act and the relevant industry Acts, is to undertake prudential oversight of regulated institutions. In doing that, we are required to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, to promote financial system stability in Australia.
APRA uses both regulation and supervision to achieve its objectives, but primarily seeks to fulfil its mandate using a supervision-led approach. We certainly believe in sound regulation and enforcement, and have over recent years introduced a more robust regulatory framework into the three main industries that we regulate: deposit-taking, insurance, and superannuation. But regulation on its own is no substitute for proactive, informed, and confident supervision.
APRA supervisors seek to ensure that regulatory requirements are met, but they also focus upon the more fundamental question: that is, are regulated entities operating soundly? By that we mean with a reasonable business strategy, robust governance and risk management arrangements, and adequate capital. Regulatory requirements are, by their nature, minimums: it is best for all concerned if regulated entities operate a safe distance from that minimum in the normal course of business. Supervisors seek to ensure this is the case. To put it another way, we primarily seek to identify and prevent problems, rather than deal with wrong-doers after the event.
A focus on supervision also provides greater ability to tailor requirements to suit individual circumstances: in other words, supervision has greater capacity to be both risk-based and outcomes-focussed. This, in turn, is likely to maximise both the efficiency and effectiveness of the prudential framework. Our observation is that the supervision-led approach seemed to be a common feature of jurisdictions that emerged relatively unscathed from the financial crisis. The APRA Members therefore see little reason to change that philosophy, and it is very consistent with the Government’s recent Statement of Expectations for APRA. We were also pleased to see the role of proactive supervision in helping deliver a stable financial system was acknowledged in the Financial System Inquiry report.
If I turn now to our 2013 Annual Report, you will see that it contains considerable detail on APRA’s reforms of the prudential framework in Australia that have occupied much of our time in recent years. I will not go into detail on all that we have done, but would like to draw out some of the most important reforms that have been, or are in the process of being, completed.
The key changes for authorised deposit-takers (ADIs) have been generated by the Basel III reforms. These reforms, which have been strongly and consistently endorsed by the G20 Leaders, are designed to deliver institutions that are far more resilient to financial stress than was evident during the financial crisis. Basel III has four components: strengthening risk-based capital requirements (which are now in place), a backstop leverage ratio, and two new liquidity metrics designed to ensure robust funding arrangements. Implementation of the full suite of reforms is not envisaged to occur until 2019, but Australian institutions are already well placed to meet them. Complementing the Basel III reforms are additional requirements for so-called D-SIBs – that is, domestic systemically important banks – designed to reflect the additional risks their failure would pose to the community.
It is often said that APRA is ‘tough’, because we sometimes impose requirements faster or stronger than the Basel standards. We may well come back to this in our discussion, but let me make two points up front: first, Basel standards are minimum requirements and it is quite common for jurisdictions to apply more stringent standards in some shape or form; and secondly, there are peer jurisdictions that have gone further and/or faster in implementing the reforms than APRA. We would not want to be perceived in any way as a soft regulator, but the claim that APRA is way out in front of the rest of the world is, quite frankly, incorrect. The FSI report earlier this week also rejected that assertion, noting that it was not uncommon for countries with strong financial systems to adopt the Basel framework without extended transition periods  and that “the weight of evidence suggests that having a more conservative approach … has not placed Australian banks at a significant competitive disadvantage.”  Furthermore, it concluded “regulators have applied the framework in a manner and timeframe to best suit Australian market conditions” 
In the insurance sector, the most important reform has been a comprehensive review of the capital requirements for both life insurance and general insurance that we commenced in 2009. The aim was to better align capital requirements across industries and to make the capital standards more risk sensitive – that is, to ensure they more appropriately reflected the risks to which each insurer is exposed. We conducted extensive consultation with industry and the final standards came into effect from 1 January 2013. By and large, the industry has coped well with the new requirements, and adjusted practices as required. As it stands at present, the industry is choosing to hold capital at almost twice the minimum level required by APRA.
Finally, in superannuation APRA has also undertaken comprehensive reform, in this case as part of the implementation of the previous Government’s Stronger Super reform agenda. A key development has been the implementation of prudential standards for superannuation, bringing the superannuation industry onto the same prudential footing as the ADI and insurance industries. The prudential standards are aimed at strengthening governance and risk management frameworks and practices in the industry and enhancing decision-making for the benefit of members, which is important given the increasing size of the industry and its important role in retirement incomes policy.
Let me conclude with a few words about the current state of the Australian financial sector.
APRA currently supervises 481 distinct entities, which hold close to $5 trillion in assets. Unsurprisingly after 23 years of a strong Australian economy, these institutions are generally in good shape. Of the 481 entities, only 11 – representing around one-tenth of 1 per cent of industry assets – are in APRA’s two highest categories for regulatory intervention: the intensive care ward, so to speak. These entities are being restored to health, or in some cases, making an orderly exit from the industry.
Beyond these entities, the remainder of the industry is broadly in good health. That said, given the nature of the financial industry, challenges and vulnerabilities always exist, including from international sources, and APRA needs to remain alert for the threat that potential risks become real problems. In the case of deposit- takers, we have made it clear we are watching housing lending standards with great interest. In the insurance sector, the group life market is experiencing difficulties, and we are keeping a close eye on how insurers manage through this. And in superannuation, the focus is largely on how super funds adjust to the new prudential regime, as well as the implications from increasing numbers of members entering the post-retirement phase.
With all of that as background for this morning’s discussion, my colleagues and I would be very happy to answer the Committee’s questions.
- Financial System Inquiry Interim Report (2014), p1-18.
- Financial System Inquiry Interim Report (2014), p3-38.
- Financial System Inquiry Interim Report (2014), p3-34.
- Financial System Inquiry Interim Report (2014), p1-18.