APRA looks to property exposure for signs of weakness

The chairman of the Australian Prudential Regulation Authority (APRA) has pointed to the commercial property exposures of banks, building societies and credit unions as a key indicator of credit quality.

During his appearance before the Senate Standing Committee on Economics, APRA chairman John Laker said the regulator’s key focus over 2009 would be on the core strength of the financial institutions it supervises.

For authorised deposit-taking institutions (banks, building societies and credit unions), Laker said APRA’s main priorities for 2009 would be credit quality and capital strength, with the regulator’s “earlier concerns about liquidity and funding” having eased somewhat.

Laker said APRA is monitoring a range of indicators of credit quality, “with a particular focus on commercial property exposures” along with capital management plans and potential access to capital.

Laker said the level of problem loans has been rising and is “broadening beyond the high-profile names that have dominated the data”.

Meanwhile, APRA has also established a team to closely monitor life insurance capital.

“We have recently asked insurers to carry out additional detailed stress tests to ensure that the consequences of any further market deterioration are well understood and appropriate contingency plans put in place,” Laker said.

Since the global financial crisis began, life insurers have taken a number of steps to fortify their businesses and reduce their exposure to falling asset values, Laker said, adding that the life insurance industry “remains in a generally sound position”.