The Australian Prudential Regulation Authority (APRA) has warned superannuation trustees to strengthen their preparedness for geopolitical shocks, identifying material gaps in how the sector manages emerging risks amid an increasingly volatile global environment.
Speaking at the Australian Banking Association (ABA) Banking Conference on 17 June, APRA chair John Lonsdale said the regulator would write to banks, insurers and superannuation trustees outlining minimum expectations for strengthening readiness against geopolitical disruptions.
Recent conflicts in the Middle East and eastern Europe had demonstrated how geopolitical events could affect the Australian economy and financial system through fuel prices, inflation and interest rates, according to Lonsdale.
“Although Australia’s financial system has shown remarkable resilience through the geopolitical upheaval of the past decade, including armed conflicts, COVID and rising trade barriers, we cannot be complacent,” he said. “Our intelligence agencies assess that the geopolitical environment is deteriorating rather than stabilising.”
The regulator said its supervisory work and the Council of Financial Regulators’ (CFR) Geopolitical Risk Program had identified six areas where industry-wide improvement was needed, with expectations aimed at ensuring geopolitical risks were properly integrated into governance, risk management and crisis preparedness frameworks.
The areas include board oversight and governance, monitoring geopolitical exposures and offshore dependencies, scenario analysis and capital planning, operational resilience, crisis preparedness and response capabilities, and managing insider threats, foreign interference and political risks.
While most entities recognised geopolitical risk, APRA found awareness had not always translated into practical action.
The regulator also said management teams remained overly focused on traditional financial risks and that crisis exercises were often insufficient to provide confidence an institution could withstand a severe geopolitical shock.
Under APRA’s expectations, boards will be required to ensure geopolitical risk is reflected in strategy, risk appetite and oversight arrangements, while management must address material gaps and report on exposures, offshore dependencies and service provider vulnerabilities.
Alongside more traditional prudential measures such as scenario analysis, capital planning and liquidity management, APRA highlighted non-traditional risks including insider threats, foreign interference and political risks linked to sanctions, restrictions on overseas assets and disruptions to international operations.
Superannuation funds are expected to play a central role in the regulator’s next phase of work, with APRA set to conduct targeted readiness assessments across selected banking, insurance and superannuation entities with heightened exposure to geopolitical risks.
The assessments will focus on crisis preparedness, personnel risks and political risks, with lessons shared across the broader industry.
Lonsdale said APRA’s forthcoming System Risk Stress Test had examined linkages between the banking and superannuation sectors and highlighted the resilience of the financial system to market and liquidity shocks.
“The exercise highlighted the resilience of our financial system to market and liquidity shocks, including the constructive role the superannuation sector can play as a stabilising force for the banking sector,” he said.
The stress test also identified vulnerabilities related to concentration risks and common dependencies, while revealing differing assumptions among banks and super funds about the extent of potential government support during severe market stress.
APRA cautioned that no institution’s crisis response plan should depend on receiving financial assistance from the government.
Highlighting Australia’s exposure to global developments, Lonsdale pointed to the superannuation sector’s substantial overseas investment holdings as one of several factors increasing vulnerability to geopolitical shocks.
“At a time of rising global instability, APRA does not intend to leave Australia’s financial system without adequate financial and operational defences for these uncertain times,” he said.
Lonsdale said institutions needed to strengthen their understanding of global developments, identify vulnerabilities and take action to improve resilience as geopolitical risks become increasingly plausible and consequential.
“Being forewarned will help ensure we are forearmed,” he said.
