The Reserve Bank of Australia, in its latest Financial Stability Review, called for superannuation funds to prioritize building resilience to severe liquidity and operational shocks to help avoid transmitting financial stress to other parts of the country’s financial system.
“Superannuation funds now account for around 160% of Australian GDP and in aggregate the value of assets held by superannuation funds are expected to continue to grow until at least 2050,” the RBA’s report stated. “The interconnections between superannuation funds and banks have the potential to transmit stress in a severe market-wide liquidity stress event.”
Additionally, the central bank said funds must focus on managing their large and expanding market presence.
“As the sector’s foreign asset holdings continue to build, there will be a growing need to hedge foreign exchange risk, which will require careful liquidity management,” the review stated.
The publication also highlighted the April cyberattacks when criminals attempt to breach the systems of several super funds, and although most attacks were repelled, AustralianSuper saw 600 member accounts accessed, with 10 members losing A$750,000 ($496,241).
“The April cyber-attacks on the sector have also highlighted the potential consequences of operational disruptions coinciding with stressed conditions in financial markets,” the RBA’s report stated. “In the months ahead, results from the first Australian Prudential Regulation Authority system risk stress test will provide further insights into the interconnections between Australian banks and superannuation funds, and the interaction between financial and operational risks.”
The central bank’s report also warned that significant increase in risk aversion in global markets could sharply increase financing costs, including in Australia, and restrict Australian financial institutions’ access to funding and liquidity in global markets.
“A resulting tightening in financial conditions would intensify financial pressures on domestic borrowers and, if severe enough to strain financial institutions’ balance sheets, could limit credit availability in the Australian economy,” the review stated. “It could also create liquidity strains for Australian banks and [non-bank financial institutions], such as superannuation funds—although there is considerable scope for most borrowers and lenders to draw down on buffers in the event of a liquidity shock. Any depreciation of the exchange rate would also play a shock-absorbing role.”
A version of this article originally appeared in our sister publication, Financial Standard, which, like CIO, is owned by ISS STOXX.
Tags: Australia, Cyber Security, financial risk, Superannuation Funds