Australia’s financial safety regulator has intensified its oversight of banks, insurers, and superannuation trustees as geopolitical tensions, artificial intelligence (AI), and growing complexity in global markets reshape the country’s risk environment.
The Australian Prudential Regulation Authority (APRA) published its latest System Risk Outlook on Thursday, affirming that the financial system remains resilient while cautioning that sustaining that strength will require ongoing investment in risk management.
“Strong capital, liquidity, and prudential safeguards mean our financial system is well-positioned to absorb shocks and continue providing critical services to households and businesses, even if economic conditions deteriorate,” APRA chair John Lonsdale said. “Sustaining that resilience, however, will require ongoing investment in strong risk management across the system.”
Banks and insurers hold capital and liquidity levels well above regulatory minimums. Stress testing conducted across 2024 and 2025, including scenarios involving unemployment reaching 10%, housing prices falling 40%, and a cyber incident affecting a critical service provider, showed participating banks could absorb significant losses while continuing to lend.
In 2026, APRA is conducting a further stress test with the five largest banks, jointly with the Reserve Bank of New Zealand, to examine the impact of a prolonged global energy supply shock.
The escalation of conflict in the Middle East has disrupted around 20% of global oil supply following the extended closure of the Strait of Hormuz. The Reserve Bank of Australia and Treasury expect the conflict to add inflationary pressures and weigh on economic growth.
APRA said its regulated entities have limited direct exposure to the region but noted that many rely on US-based technology service providers, warranting close monitoring.
APRA identified rapid AI adoption as a growing concern, warning that governance arrangements have not kept pace with the technology. The regulator recently wrote to industry participants reinforcing minimum expectations for boards and executives and signalling potential enforcement action where risks are not managed effectively.
“Among the areas we are most focused on are rapid developments in AI, which are outpacing the ability of many entities to manage the risks,” Lonsdale said.
Cyber threats were also identified as intensifying, with increasingly advanced AI models expanding the capabilities of threat actors. APRA called on institutions to prioritise strengthening cyber defences, in line with advice from the Australian Signals Directorate.
Household debt remains just below 180% of disposable income, high by both historical and international standards. Since 1 February 2026, APRA-regulated banks have been subject to a limit restricting new mortgage lending to highly indebted borrowers to no more than 20% of total new lending. Preliminary March quarter 2026 data suggest lending remains comfortably below that threshold.
APRA said domestic risks associated with private credit remain contained. A 2025 report by Williams and Timbs, prepared for the Australian Securities and Investments Commission, estimated Australia’s private credit market at about $200 billion, equivalent to roughly 3% of the banking system’s size.
However, the report warned that international market stress could spread more rapidly than in the past because around half of superannuation funds’ private market exposures are held offshore.
“Moving forward, we will continue to assess how APRA-regulated entities are being impacted by overseas events and how well prepared they are for a range of potential downside scenarios, as well as seeking further uplift in cyber security capabilities and AI governance,” Lonsdale said.
The next edition of the System Risk Outlook is expected late this year.
