Although geographically isolated, Australia’s economy and financial system are heavily reliant on the global market, according to Australian Prudential Regulation Authority (APRA) chair John Lonsdale.
Last month APRA formally began consulting with banks, superannuation trustees and fellow regulators as part of its plan to conduct its first financial system-wide stress test in 2025, which aims to examine how risks can transmit between different sectors of the financial system.
At the European Australian Business Council luncheon on Monday, Lonsdale reminded attendees that Australia, a country “built on the sheep's back”, depends on international trade, with three million jobs and a quarter of the country’s GDP tied to exports.
“The world has always been an uncertain and sometimes dangerous place, and interconnection brings risks as well as opportunities,” he said.
“But just as Australia’s national prosperity has been built over the past two centuries on international trade, so does our financial system rely on access to global markets. Isolation is not an option.”
The chair pointed to the increasing recognition of geopolitical risk as the foremost threat to the financial system.
Namely, Bank of England’s recent systemic risk survey identified it as a key concern, and a survey from the Reserve Bank of New Zealand this month showed that geopolitical risk was the most commonly cited threat after 13 local banks simulated scenarios that might cause them to breach capital requirements.
“While we continue looking for information we can use to reinforce the resilience of the banking, insurance and superannuation industries, it’s important to note that Australia’s financial system is already in a strong position to deal with a crisis,” Lonsdale added.
“That strength has been built up over many years in alignment with international best practice and lessons from real life events.”
Expanding on how geopolitical risks emanating from outside the financial system can impact Australia, he said the first contributing trend is the increased interconnection and complexity of the global financial system.
“Our banks rely on international markets for funding and capital; our insurers depend on a handful of global reinsurance giants; and our superannuation funds heavily invest billions of dollars of members’ money in overseas assets,” he said.
The second is the growing reliance of financial entities and their customers on digital technologies.This includes cyber-attacks, system outages, and supply chain vulnerabilities that could disrupt critical services.
“Third is the current period of heightened geopolitical volatility, with wars in Europe and the Middle East, and great power competition and territorial disputes in the Asia-Pacific. Less visible, but no less important, is acceleration in the fragmentation of the international order into different regional and political blocs,” Lonsdale continued.
“In the years since the global financial crisis, support for globalisation has waned, the number of free trade agreements globally has stalled at the same time as the volume of trade restrictions including tariffs and sanctions has risen sharply.”
Lonsdale said that against this backdrop, financial regulators globally are sharpening their understanding of how geopolitical shocks may spill over into the financial system and increase awareness, adaptability and resilience to these risks.
“We can ensure our banks, insurers and superannuation trustees have the financial and operational resilience to keep supporting their customers and the economy in the event of a crisis,” he said.
“We might not be able to prevent uncertainty, but we can be certain of the strength of our financial system to deal with it.”
