APRA chair Wayne Byres on the industry's progress in managing major risk trends

Operational resilience;
Governance, culture, remuneration, and accountability; and
Climate change.

Contents

Operational risk

Byres said the COVID-19 pandemic put the Australian financial system through a significant stress test of its operational resilience, leaving financial institutions to adjust to the challenge of having most, if not all, of their employees working from home while still providing their services and responding to emergency programs such as loan deferrals and superannuation early release.

He noted that the financial system’s operational resilience held up well despite the various impacts of the pandemic. However, it is crucial to remind financial institutions that disruptions to financial services, even temporarily, can significantly impact the community. As a result, APRA has examined the availability and quality of data at the largest institutions, including interrogating their data from their governance, risk, and compliance systems.

“In promoting a stronger focus on data, metrics, limits, and tolerances, we do not want to see executives and boards flooded with numbers. That would not be helpful. Rather, we need risk managers to use that information to provide meaningful insights. Doing so will aid the detection of genuine shortcomings and vulnerabilities, as well as improve the ability to take timely action to address the root cause of problems,” Byres said.

Read more: APRA Deputy Chair Helen Rowell on poor insurance risk management

Governance, culture, remuneration, and accountability

According to Byres, getting a risk culture is now critical to good risk management and broader organisational success and reputation.

Therefore, having risk culture surveys may help provide insights from employees in financial institutions on perceived risk behaviours and the effectiveness of the risk management architecture they work within.

“Over time, the responses will help identify the extent to which positive changes are (or are not) taking place within individual institutions, as well as areas for improvement. It also provides APRA with the ability to benchmark results across institutions, facilitating peer analysis and comparison,” Byres said.

Climate change

Climate change and its impacts have gathered the attention of boards, especially in insurance companies.

“The complex interactions between climate risks and business activities present genuine challenges for risk management, as does the extended time horizon over which climate risks may materialise. The risks that could emerge are novel in nature and hard to measure with precision. Moreover, the potential for climate risks to have a compounding effect on traditional risk types such as credit, market, liquidity, and operational risks adds to this complexity,” Byres said.

As a result, APRA has undertaken a climate vulnerability assessment (CVA) with the five largest banks to look at the potential financial exposure of its regulated entities to climate change’s physical and transition risks.

Byres’s speech follows APRA Deputy Chair Helen Rowell’s speech for the Risk Australia conference, focusing on poor insurance risk management.