The Council of Financial Regulators (the Council) held its regular quarterly meeting on Friday, 19 June. The Australian Treasurer attended for part of the meeting. The Council has been meeting more frequently over the past several months and will continue to do so as required.
The Council’s discussion focused on the ongoing coordinated response to the coronavirus (COVID 19) crisis. The virus and the measures taken to contain it have resulted in the Australian economy experiencing its biggest economic contraction since the 1930s. However, the rate of new infections has declined sharply in Australia and restrictions have been eased in many parts of the country earlier than was previously thought likely. As a result, economic activity is now beginning to recover in some sectors. Conditions in financial markets internationally and in Australia have improved after a period of significant disruption in the early stages of the pandemic. The ongoing coordinated response of governments, central banks, regulators and the private sector is working and will help to support the recovery ahead. However, the outlook, including the nature and speed of the expected recovery, remains uncertain and the pandemic is likely to have long-lasting effects both in Australia and abroad.
The financial sector has played an important role in helping to cushion the effects of the shutdown on households and businesses and will be equally important in supporting the economic recovery. Financial institutions have entered this period with a high level of resilience. In the period ahead they will continue to experience the flow-on effects of the stress experienced by businesses and households. Council members discussed the importance of the transition as the economy recovers and support measures, including temporary loan repayment deferrals, begin to be unwound later in 2020. Members agreed that financial institutions, regulators and governments will need to continue to show flexibility in order to support the objectives of economic recovery, resilience of financial institutions, and fair household and business outcomes.
Council members also discussed APRA’s latest stress testing analysis, which is providing insights into the possible effects of a range of economic scenarios on ADIs’ capital. The stress testing analysis will assist APRA in considering its supervisory approach in the period ahead. Members stressed the importance of the continued flow of credit for the recovery of the economy. APRA has reiterated that the large capital buffers above regulatory minimums that were built up in more favourable times ought to be used during this extreme shock. Members encourage institutions to make use of their capital buffers to continue to support businesses and households.
In addition to domestic developments, Council members discussed the risks in the global financial system that are being reviewed in international forums. These include: the ability of investment funds to effectively manage liquidity risk; the build-up of corporate debt in some economies; non-financial firm solvency risks; the structurally low level of profits in some banking systems; potential stresses in US dollar funding markets; and the ability of market participants and financial market infrastructures to manage evolving counterparty risks. Members agreed to continue to monitor these developments closely, given the potential implications for the Australian financial system.
The Council also held its annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the Australian Competition and Consumer Commission (ACCC), the Australian Taxation Office (ATO) and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Discussions focused on the COVID-19 pandemic and covered the responses of regulatory agencies to the pandemic, the role of financial sector competition in supporting economic recovery, and the operational resilience of regulated entities. Participants noted that extensive cooperation between agencies had been critical to the successful delivery of a number of COVID-related initiatives in recent months. They discussed other areas for further cooperation and joint work, including a focus on effective systems for establishing and verifying digital identity. Participants also highlighted the importance of ensuring robust consumer protection mechanisms during the pandemic, particularly in light of increased susceptibility to conduct risks, including scams, false and misleading advertising, and inappropriate financial advice. Participants welcomed the implementation of the Consumer Data Right reforms from 1 July 2020.
Council of Financial Regulators
The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.