A new report from the prudential regulator has revealed super funds can act as both a stabilising force and an amplifier of shocks in an interconnected economy.
In its newly released Systemic Risk Outlook report, the Australian Prudential Regulation Authority (APRA) has flagged rising financial system interconnectedness as a key risk area facing the domestic financial system, in particular highlighting the expanding role of superannuation.
The regulator found that while the sector has traditionally acted as a stabiliser during shocks, its increasing size and deeper connections across the system – especially with banks – mean its actions in a crisis could also amplify stress in certain scenarios.
The inaugural report, set to be published biannually, aims to improve transparency around what APRA is seeing across domestic and international risk environments and how it is used to inform its regulatory policies.
It also pointed to several other key risk areas, including elevated geopolitical threats exposing Australia to overseas shocks, and domestic vulnerabilities such as the housing market and high household debt.
In this area, APRA flagged some early signs of increased higher-risk lending, particularly a rise in high debt-to-income borrowing among investors.
Other, less visible vulnerabilities identified by the regulator included cyberattack risks and the limited transparency in the private credit market, among others.
Commenting on the findings, APRA chair, John Lonsdale said the insights are encouraging but also underline why complacency is not an option.
“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 emphasise 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,” Lonsdale said.
The report also summarised findings from Phase 1 of APRA’s inaugural system risk stress test, conducted this year with the four major banks and six large super funds.
For the test, participants assessed the effects of a “severe but plausible” 12-month shock to financial markets and the domestic economy, alongside a secondary operational disruption – such as a major tech outage – that would leave banks and super funds unable to trade for a full week.
It assumed no change in government policy or exceptional support, unlike during the COVID-19 pandemic when the federal government allowed super fund members to make emergency withdrawals.
While banks and super funds were deemed capable of withstanding this kind of financial shock, the assessment also highlighted several key areas of heightened vulnerability – the first of which centred on the superannuation industry.
Based on the test, funds found they could “maintain sufficient cash and liquid assets to meet member requests and other obligations during the stress”. However, they would be forced to rapidly adjust their asset allocation, which would likely have negative consequences for member returns.
Meanwhile, banks were found to experience “significant liquidity stress because of a large and sudden withdrawal of deposits and other forms of funding”, including by super funds.
Despite this, each bank in the test nevertheless demonstrated it could gradually restore liquidity and meet its obligations as they came due.
While the operational outage was found to intensify the shock, especially for banks and liquidity, it was also judged to be survivable.
Overall, the financial system’s interconnections were found to produce both positive and negative effects, but were ultimately deemed acceptable.
Looking ahead, Lonsdale said APRA would “shortly commence” Phase 2 of the exercise, “which will test the robustness of the Phase 1 findings and consider other areas of analysis.”
The regulator said it expects to release a final, detailed report of the findings, including Phase 2, in mid-2026.
