Australian Prudential Regulation Authority urges mutual banks to manage strategic risk and finds weaknesses in CPS 190 recovery and exit planning

The Australian Prudential Regulation Authority (APRA) published remarks to customer-owned banks warning that “strategic risk” in business models and corporate strategy is becoming more acute, and that boards need to adapt to a rapidly changing banking environment. APRA also summarised findings from a 2024 thematic review of banks’ recovery and exit planning conducted ahead of Prudential Standard CPS 190, concluding that mutual banks need to materially lift the quality and executability of their plans. APRA pointed to a shifting operating context despite mutuals’ growing housing lending market share of roughly 5% (up from less than 3% a decade ago, and up around 0.5 percentage points over the past 12 months), citing demographic and customer-preference changes towards digital channels, high upfront technology costs, heightened fraud and cyber risks, and continuity expectations linked to CPS 230 Operational Risk Management. It also highlighted governance and capability pressures, noting that almost 80% of entities under heightened risk-based supervision have underlying governance problems, and referenced its recently released governance consultation aimed at updating expectations, streamlining requirements and clarifying what boards can delegate and what they should expect from senior management. On CPS 190, key shortcomings were triggers that are set too late and too close to capital and liquidity minimums, overly complex or ambiguous trigger frameworks with limited non-financial indicators, and recovery and exit actions that are not credible or readily executable, often lacking preparatory measures, clear language and a preferred exit option; better practice includes early warning and cascading triggers, assessing capital and liquidity impacts of actions, and pre-positioning exit options such as business transfers. CPS 190 is in force from the start of 2025, and APRA signalled it expects mutual banks to strengthen trigger frameworks and practical recovery and exit options to avoid discovering problems too late and risking supervisory intervention. Work is also continuing through the Council of Financial Regulators’ review of small and medium banks, alongside the Australian Competition and Consumer Commission, to consider changes that support competition without undermining financial safety and stability.