Wayne Byres, Chairman - Joint Standing Committee on Trade and Investment Growth, Canberra
Thank you for the opportunity to appear today. APRA made a submission to this inquiry in April and I would like to briefly highlight three key points from that in my opening statement.
First is our role. APRA is responsible for prudential supervision of specific financial institutions – broadly speaking, banks, insurers and superannuation funds – and for promoting financial system stability in Australia. Prudential regulation recognises that financial institutions earn their profits by taking risks with the monies entrusted to them by the Australian community, and that those risks must therefore be well managed. Our requirements are designed to ensure financial institutions identify and manage risks to reduce the possibility they may fail to meet their financial promises to bank depositors, insurance policyholders and superannuation fund members.
Second is our approach. As we supervise financial institutions, APRA generally seeks to avoid overly prescriptive regulation, instead adopting a principles-based approach wherever possible. Given the diversity of institutions that we oversee, we believe a principles-based approach is more cost-effective, enables the application of regulation to be better tailored to individual circumstances, and reduces barriers to innovation.
APRA’s standards therefore do not prescribe a financial institution’s business model, products or business lines. Our prudential standards rarely refer to specific industries or geographies. Rather, our general philosophy is that financial institutions should be free to design their own structure, products and services, provided they have the commensurate governance, risk management, internal controls and financial strength to mitigate the risks involved.
With that context, my third point relates to our work in the area of climate-related financial risks. Particularly since the Australian Government became party to the Paris Agreement in 2016, APRA has been ensuring financial institutions are aware of, and thinking about how to respond to, the financial risks (and opportunities) arising from a changing climate.
As part of that, in April this year APRA released for consultation some draft guidance on managing the financial risks of climate change. The draft Prudential Practice Guide CPG 229 is intended to help regulated institutions assess, and where necessary respond to, climate-related financial risks. Importantly, the guidance neither promotes nor prohibits specific investment, lending or underwriting decisions: it simply seeks to support well-informed decision-making. It is also designed to be flexible, allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.
APRA has also been working with Australia’s largest five banks on a climate vulnerability assessment. This work is designed to measure the potential financial risks to the banks, the financial system and economy posed by climate risks, understand how the banks may adjust their business models and implement management actions in response to the different climate scenarios, and to improve the climate risk management capabilities of the banks. This work is ongoing, and we expect to report the outcomes of the work in the new year.
To conclude, as we’ve seen during the current pandemic, a strong and stable Australian financial system is fundamental to the ongoing health and prosperity of the Australian economy, both now and into the future. With that in mind, the effective management of risks to both individual institutions and the system overall is APRA’s primary objective in all the work we carry out.
With those opening comments, my colleagues and I are happy to answer questions from the Committee.