The Reserve Bank has warned banking bosses of their “ultimate responsibility” for managing the emerging and unprecedented threats to the nation’s financial system.
Speaking at an Australian Finance Industry Association event in Sydney on Tuesday, RBA assistant governor for financial services Brad Jones, one of the central bank’s most senior executives, cautioned that Australia was entering a “a decade laden with new types of risks”.
Among the future hazards were artificial intelligence, climate change, cyber attacks and a rapid-fire run on the banks accelerated by the digital age which would slow growth, drive up inflation, and push interest rates higher for longer.
“Ultimate responsibility here lies with industry,” Dr Jones said, calling on bosses to ensure their businesses were resilient against emerging threats.
“There are limits to what even the most finely calibrated regulatory and supervisory regime can achieve when industry governance and risk management practices fall short.”
“We have a shared interest in getting our collective response right.”
Risks from within Australia
Citing the collapse of Silicon Valley Bank earlier this year where the bank lost 30 per cent of its deposit base “in a matter of hours”, Dr Jones singled out the uptake of digital technologies as amplifying the risk of a run on the banks.
While acknowledging that bank deposit runs were “old as banking itself”, the assistant governor noted money can now flow at “unprecedented speed” in response to the rapid spread of information and misinformation.
“Herding effects associated with social media present a new challenge for financial regulators,” he said.
“It is clearly easier to withdraw deposits at the stroke of a keyboard than it is to stand for hours in the rain outside a bank branch and bury cash in the yard.”
Dr Jones also singled out structurally higher interest rate volatility in the years ahead which could create increased stresses for banks, borrowers and the functioning of the financial market more broadly.
Global threats to stability
The risks to Australia’s financial system imported from overseas in the form of geopolitical tensions and climate change could additionally act as a destabiliser, Dr Jones warned.
“Global shipping could become prohibitively costly or uninsurable along certain routes,” he said.
“Cross-border assets could be frozen or seized. Payment systems and financial market infrastructures could be affected by sanctions and counter-sanctions.”
He said the physical risks from more extreme weather, climate change and higher average temperatures would also affect stability in coming decades.
“Transition risks, including unexpected changes to regulations and consumer preferences, can also lower the value of assets or businesses in emissions-intensive industries.
“These risks can result in unexpected losses for lenders, increased claims on insurers and write-downs for investors – as we are now observing.”