Bank culture and cybersecurity are the emerging risks to financial stability identified by the Reserve Bank in its semi-annual heath check of the finance sector.
The central bank cited “lapses” and “weak internal controls” at Australia’s banks in its 66-page Financial Stability Review published on Friday, amid concerns that the largest lenders are cutting corners to keep their profits on track.
Regulators are typically reluctant to call out failings of individual institutions but the RBA document made several references to the “apparent deficiencies in anti-money laundering practices at the Commonwealth Bank”, after the financial intelligence agency AUSTRAC launched civil action against the lender in August.
“For [banks] as well as general and life insurers, this has emphasised the need for their boards to identify desired changes to risk culture and ensure steps are taken to address those changes,” the Reserve Bank said.
The report comes as outgoing Commonwealth Bank chief executive Ian Narev and new chair Catherine Livingstone prepare to front the banking parliamentary committee in Canberra on Friday. They are expected to face tough questioning over the bank’s handling of an apparent failure to tighten anti-money laundering controls.
Cybersecurity and the rise of new fintech operators are among the emerging issues being considered by global regulators, the RBA’s review said.
The Reserve Bank said it had conducted a detailed assessment of the cyber resilience of Australia’s main “financial market infrastructures” (FMIs), such as stock exchanges, clearing houses and payment system operators.
It also required these institutions to conduct self assessments and have their arrangements reviewed externally against industry standards on cyber-resilience.
“Consistent with the international guidance, these ‘FMIs’ have also developed concrete plans to improve their capabilities to recover from a cyber attack,” the RBA said.
The central bank reiterated previous warnings to the banks not to lower their risk controls or alter their behaviour. “In the current environment where investors still expect high rates of return, despite regulatory and other changes that have reduced bank return on equity, banks need to be careful of taking on more risk to boost returns,” the RBA said.
The Financial Stability Review cited further risks in the housing market while revealing that the central bank would conduct its own stress tests on the banking system.
National Australia Bank chief executive Andrew Thorburn will also appear before the House of Representatives standing committee on economics on Friday.
The RBA said that building strong risk culture and governance frameworks was central in ensuring banks don’t take too many risks. It called out the new powers due to be granted to the Australian Prudential Regulation Authority to impose penalties and dismiss banking executives for poor conduct and withhold bonuses for four years.
APRA initiated an inquiry into the CBA’s culture in August – a rare move for the regulator, which typically deals with issues behind close doors. The inquiry will be led by former APRA boss John Laker, former competition watchdog head Graeme Samuel and company director Jillian Broadbent. A progress report is due with APRA at the end of January.