Australian Prudential Regulation Authority publishes first System Risk Outlook and Phase 1 system risk stress test findings

The Australian Prudential Regulation Authority (APRA) has published its first System Risk Outlook, a new twice-yearly report setting out APRA’s assessment of key risks and vulnerabilities in the Australian financial system to increase transparency and inform regulatory priorities. The inaugural edition highlights elevated overseas and geopolitical risks, emerging domestic vulnerabilities in housing, and the growing potential for shocks to spread across an increasingly interconnected system. Overseas risks are described as heightened, with geopolitical conditions expected to remain volatile, and the report notes that resilience could be eroded if institutions are not prepared for a wide range of scenarios. Domestically, APRA is monitoring housing-related vulnerabilities, including high household debt, and reports signs of a pick-up in higher risk lending, particularly high debt-to-income borrowing by investors, even as overall housing lending standards remain sound. The report also summarises Phase 1 findings from APRA’s inaugural system risk stress test conducted this year with the four major banks and six large superannuation funds, indicating that super funds can act as a stabiliser during stress but that, in some cases, their actions may amplify negative effects for members and the broader system. APRA and other Council of Financial Regulators agencies are strengthening resilience through a dedicated geopolitical risk work program. Phase 2 of the system risk stress test is expected to commence shortly, with a final detailed report incorporating Phase 2 findings planned for mid-2026.