Therese McCarthy Hockey’s opening remarks to FINSIA’s The Regulators

Good afternoon.

In preparing to speak here today, I was looking through your website and saw the FINSIA members’ aspirations of professionalism, integrity, and high standards. Like you, regulators seek to perform our roles to the highest level, which for APRA means enabling a strong and resilient financial system. We do this in a dynamic environment where we must constantly assess the competing aspects of our mandate.

In the short time I have for prepared remarks before today’s panel discussion, I want to tell a story of three Ps – which I hope will illuminate how we’ve thought about these tensions and constructed our latest Corporate Plan.  

The first P is one that APRA is best known for because it’s in our name. The word “prudential” doesn’t mean much to people outside of finance, but they’re probably familiar with the notion of “prudence” – meaning to be careful and thorough. For APRA, prudence is about foresight, discipline, and resilience. It’s a primary reason our financial system has weathered global shocks and domestic challenges with financial strength and operational resilience.

In the aftermath of the Government’s three-day Economic Reform Roundtable last month, the national conversation is very much fixated on a different P-word – my second P: “productivity” and how to lift it in order to boost wages, economic growth and Australians’ living standards. 

Across government, industry, and the community, there’s a growing recognition that lifting productivity is essential to Australia’s long-term prosperity. The financial system has a critical role to play. Whether it’s through efficient capital allocation, digital innovation or better retirement outcomes, our institutions must be part of the solution. 

One of the ways we seek to achieve this is through my third P today – “proportionality”. In a world of rapid technological change, regulatory expectations must be scaled and targeted. For APRA, this means our framework has fewer and less onerous requirements in many areas for smaller, less complex and less systemically significant institutions. Our framework is also principles-based. We avoid overly prescriptive requirements, which would otherwise stymie innovation and increase compliance costs.

Over recent years, we’ve undertaken a range of actions to increase proportionality and reduce regulatory burden. For example, last year we reduced our policy consultations by more than half. We’ve ceased multiple data collections, streamlined reporting requirements and modernised the prudential architecture to make it easier to understand and simpler to navigate.

Looking ahead, our Corporate Plan identified a range of further initiatives to minimise regulatory burden for industry, where it is safe to do so.

Collectively, these actions underpin our ambition to “get the balance right”, which we called out as one of our four key strategic objectives in the Corporate Plan. The balance we’re referring to relates to the tension between our primary mandate for financial safety and stability and other considerations such as competition and efficiency. 

An examination of the dynamics of Australia’s banking sector illustrates the point. 

In a recent assessment of our banking system, international ratings agency S&P noted the strength of Australia’s prudential regulatory standards for banking and APRA’s supervision role in it. It also noted approvingly that “the … industry's oligopolistic structure supports system stability.”  Here we can see an alignment between two of our Ps: prudential and productivity. International ratings agencies’ strong positive assessment of the safety and stability of our banking sector lowers the cost of funding for our banks. This benefits the flows of capital and liquidity, which are the engine room of the economy.

Although this market structure brings value, many in the community believe the ongoing market dominance of the major banks dampens competition, especially in regional areas, that might otherwise put greater downward pressure on fees, keep branches open and lift standards of service.

Our challenge as a regulator is therefore to encourage the rewards of increased competition, efficiency and innovation without eroding the benefits that accrue from a safe and stable banking system.

Cyber security is one of the areas where the tension between prudential safety and proportionality is most apparent. In its recent review of small and medium-sized banks, the Council of Financial Regulators ¹(CFR) found that changing market trends and consumer preferences require banks of all sizes to invest ever more resources into digital banking technologies such as apps and websites. The high fixed costs of establishing and maintaining these systems inherently disadvantage smaller banks with shallower pockets. But the costs don’t stop there. Since 2019, APRA’s prudential standard CPS 234 Information Security has set out binding cyber-security requirements that all banks, insurers and super trustees must meet.

Reducing our cyber expectations for smaller banks could contribute to lower costs that would help these banks compete financially with larger rivals. But in a worsening cyber security landscape fuelled by geopolitical volatility and artificial intelligence, to do so would create unacceptable prudential risks. I daresay bank customers would also not accept knowing that their small bank provided less cyber security protections than a larger bank. For these reasons, we have actually stepped up our focus on cyber in our latest Corporate Plan.  In this battle of the P-words, “prudential” wins out.

But there are other areas where we believe we can ease the pressure on smaller banks without creating unacceptable risks.

As part of the CFR Review, APRA has committed to a range of actions to ease the regulatory burden on smaller banks, including:

• simplifying our bank licensing regime, which we think will cut in half the time taken for the licensing process and put new entrants on a stronger footing to become sustainable;
• providing greater clarity on our supervisory expectations around banks’ capital requirements related to specific risks and what they need to do to lower them; and
• introducing a third tier into our proportionality framework for banks, with the potential for a fourth tier for the very smallest banks provided APRA is granted stronger resolution powers for this cohort.

I hope these examples give you a little extra insight into how APRA thinks about the trade-offs we make between competing aspects of our mandate. In an uncertain, volatile and deteriorating operating environment, our top P-word must always be “prudence” to preserve financial stability and protect the safety of bank deposits, insurance policies and Australians’ super savings.

But with our commitment to getting the balance right, we believe we can achieve that goal while also supporting the push to prioritise productivity. 

I will pause on that point and prepare to answer your questions presently.

Footnote

¹ The review was undertaken by the CFR plus the Australian Competition and Consumer Commission