Australian Financial Regulator Warns of Rising Pressures in New System Risk Outlook

Key Takeaways

• System Stability: APRA’s new System Risk Outlook report finds the financial system stable and resilient but exposed to rising international and domestic pressures.
• Geopolitical Risk Focus: Geopolitical risk is now the top concern among regulated entities, prompting a multi-year resilience program with other CFR agencies.
• Housing Vulnerabilities: High household debt, renewed housing price growth, and early signs of higher-risk lending are increasing domestic vulnerabilities.
• Superannuation Interconnections: The expanding size and interconnectedness of the superannuation sector can stabilise the system during stress but may also amplify shocks in some scenarios.
• System-Wide Stress Test: APRA’s inaugural system risk stress test shows banks and super funds can withstand severe scenarios, with Phase 2 results expected in mid-2026.

Deep Dive

Australia’s financial system is in solid shape, but far from storm-proof. That’s the message from the Australian Prudential Regulation Authority’s first System Risk Outlook report, released on Thursday, which sets out how global tensions, housing vulnerabilities and growing interconnections across the system are shaping APRA’s priorities.

The new report will be published twice a year and is intended to give banks, insurers, superannuation funds and the wider public a clearer view of how APRA is reading both domestic and international risks. The regulator’s verdict in this first edition is cautiously reassuring: the system is safe, stable and resilient, and APRA-regulated entities are judged capable of continuing to provide critical services even if adverse shocks hit.

But APRA is equally clear that those shocks are becoming more complex, and that “cracks in the roof” of the system, such as high household debt or over-reliance on key service providers, could make any future storm more damaging if not managed early.

Geopolitical Risk Moves to the Top of the Worry List

More than two-thirds of APRA-regulated entities now rank geopolitical risk as a critical or high concern, according to the report. APRA highlights ongoing conflicts, strategic power rivalries, and strained trade and security alliances as reasons why global conditions are likely to stay volatile for some time.

Shocks from abroad can reach Australia through multiple channels at once: weaker global trade and growth, abrupt moves in financial markets, and safety and security issues ranging from cyber-attacks on critical infrastructure to foreign interference and sanctions. APRA notes that while traditional economic and financial channels are reasonably well understood, newer channels tied to security and operational disruption add extra layers of complexity.

To get ahead of that, APRA and the other agencies on the Council of Financial Regulators (CFR) have launched a multi-year geopolitical risk work program. The initiative focuses on horizon scanning, payments system resilience, sanctions preparedness, personnel risk, and crisis coordination, and is aimed at pushing institutions to embed geopolitical considerations more deeply into their enterprise risk frameworks rather than treating them as a standalone issue.

Housing Vulnerabilities Remain a Key Domestic Fault Line

Closer to home, housing remains APRA’s main domestic vulnerability. Gross household debt has sat at around 1.8 times income for almost a decade, high by both historical and international standards, and highly leveraged borrowers are more exposed if conditions turn.

With interest rates easing this year, the report notes renewed momentum in housing prices, stronger investor activity and a pick-up in some forms of higher-risk lending. While overall housing lending standards are still described as sound, APRA is seeing more high debt-to-income loans among investors and expects more high loan-to-valuation ratio lending as government schemes such as the 5% Deposit Scheme expand.

APRA cautions that the combination of higher prices, rising credit and competitive pressure for new lending could, over time, chip away at both borrower and bank resilience if underwriting standards slip. The regulator is already engaging with lenders to make sure macro-prudential tools, such as capital buffers, limits on high DTI or interest-only lending, and minimum serviceability buffers, can be activated quickly if needed to lean against excessive risk-taking.

Interconnected System, Bigger Role for Superannuation

The report devotes significant attention to how the structure of the financial system itself is changing. APRA now supervises 1,147 entities holding more than $9.8 trillion in assets, almost double the level a decade ago, and the links between them have multiplied.

Nowhere is that more visible than in superannuation. The industry’s assets have doubled over ten years to $4.3 trillion, with about two-thirds managed by APRA-regulated funds. Structural features such as compulsory contributions, long-term investment horizons and limited borrowing capacity mean super funds have historically acted as a stabilizing force in times of stress.

However, their growing size and connections—to banks through debt and equity holdings, and to a small set of third-party providers for critical services—mean their actions in a crisis could also amplify stress in some circumstances. APRA is testing those dynamics through its inaugural system risk stress test, which looks across both the banking and superannuation sectors rather than at each industry in isolation.

Early findings from Phase 1 suggest that super funds were able to maintain liquidity and continue supporting bank solvency under a “severe but plausible” scenario, but portfolio rebalancing had uneven effects on different member groups. Banks, meanwhile, came under considerable liquidity pressure after large and sudden withdrawals, including from super funds, but showed they could restore buffers through a range of actions.

The stress scenario also layered in an operational disruption that temporarily prevented trading in securities. That shock intensified pressures on banks in particular and highlighted areas where both banks and funds can improve their operational responses.

APRA plans to refine and extend this work in Phase 2 and expects to publish a detailed final report on the full stress test, incorporating both phases, in mid-2026.

Operational and Third-Party Risks Under the Microscope

The report also underlines the way digitalization and reliance on third-party providers have changed the risk profile of the system. APRA points to an environment where more services are delivered via complex technology supply chains, a relatively small group of providers support critical functions across multiple institutions, and cyber-attacks are becoming both more frequent and more sophisticated.

To tighten defenses, APRA’s new Prudential Standard CPS 230 Operational Risk Management took effect on 1 July 2025. It requires banks, insurers and super funds to identify their most important business services, determine how those services will be maintained under severe disruption, test business continuity plans, and strengthen oversight of material service providers. Early data show some large institutions rely on around 150 material service providers on average, increasing the risk of concentration and single points of failure.

APRA is using new data collections on service providers to build a system-wide picture of where those concentrations sit and is working with other CFR agencies on broader oversight of critical third parties, including where providers sit outside the Australian regulatory perimeter.

Beyond the regulated core, APRA is also watching the growth of non-prudentially regulated financiers such as non-bank lenders, private credit and private equity firms. These players can enhance competition and offer specialized financing, but they can also take on higher risk and add leverage that is less visible in official data. While they currently account for a small share of activity and are not seen as a major threat to financial stability, APRA sees their growth and their links to regulated institutions as an area that warrants close attention.

APRA Signals Ongoing Vigilance

APRA Chair John Lonsdale said the report reinforces that the system is strong but still exposed to fast-moving global and domestic pressures, “The insights from our System Risk Outlook report confirm that Australia’s financial system is stable, resilient and well-placed to absorb shocks, but they also emphasize why we can’t be complacent. International political and economic uncertainty remains elevated, which is why APRA is stepping up its focus on geopolitical risk. Domestically, housing remains a key vulnerability, given high household debt and prices continuing to rise. We are carefully monitoring these risks and ensuring banks are prepared to implement additional macro-prudential tools where required to reinforce lending standards.”

Lonsdale said APRA’s first system-wide stress test is adding new depth to its understanding of how shocks can move across banking and superannuation.

“Our inaugural system risk stress test is an important addition to APRA’s stress testing regime by helping us better understand how linkages in the financial system could dampen or amplify shocks. We will shortly commence Phase 2 of the exercise, which will test the robustness of the Phase 1 findings and consider other areas of analysis,” he said.

The core takeaway is that the system can withstand rough weather, but continued vigilance is essential.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.