Prepare for GFC conditions, says APRA
The insurance and superannuation industries are relatively well placed to absorb further falls in the stock market and a blow-out in credit spreads, according to Australian Prudential Regulation Authority (APRA) chairman John Laker.
Addressing the Senate Standing Committee on Economics, Laker said the renewed turbulence in global financial markets showed that the "global financial crisis that erupted over four years ago has further to run".
The Australian banking system is well placed to deal with future market volatility, said Laker. Australian authorised deposit-taking institutions (ADIs) have a record-high Tier 1 capital ratio of 10 per cent, and the banking system here has a limited exposure to the European countries currently under the most pressure.
"ADIs could survive a period of months without access to global term debt markets, provided short-term and domestic markets continue to operate relatively normally," Laker said.
Stress testing conducted by APRA has also found that the life insurance industry, with its substantial portfolios of equities, is capable of absorbing large market declines and adverse credit spread movements, Laker said.
The general insurance industry is less exposed to equities than the life insurance sector, but it has substantial fixed interest portfolios - making it sensitive to movements in credit spreads.
The superannuation sector, which is heavily exposed to share markets and credit spreads, has been encouraged by APRA to hold sufficient liquidity to ensure that benefit payments can be paid to members regardless of circumstances.
"APRA is also closely monitoring the funding positions of defined benefit funds to ensure trustees are well on top of the situation," Laker added.
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