Financial Institutions Suffer Losses Amidst Operational Disruptions and Climate Concerns

Australian financial institutions are facing significant losses due to a combination of operational disruptions, cyber threats, and longer-term challenges posed by climate change.

Underpricing and Overly Generous Product Features Contribute to Losses

Individual disability income insurance has been a major contributor to these losses, resulting from substantial underpricing and overly generous product features that have led to higher-than-expected claims. In 2019, the Australian Prudential Regulation Authority (APRA) intervened, requiring firms to adjust their insurance policies and imposing capital charges until the measures were implemented.

Operational Resilience Issues at Financial Market Infrastructures

The financial sector is also grappling with operational resilience issues at financial market infrastructures (FMIs), such as central counterparties and securities settlement facilities. In November, ASX experienced a series of significant operational incidents that affected trading and settlement systems, prompting an investigation by the Australian Securities and Investments Commission (ASIC).

Cyber Threats Pose a Constant Risk

Cyber attacks and incidents pose a constant threat to financial institutions’ IT systems, with recent examples including a data breach involving a legacy file sharing service provider. Regulators have initiated initiatives to support financial institutions in strengthening their cyber resilience.

Climate Change Emerges as a Significant Challenge

Climate change is also emerging as a significant challenge for the financial sector, exposing it to physical risks that will rise over time if not addressed. Investors in oil and gas companies have already suffered losses due to declining asset values, driven by expectations of an accelerated transition to a lower-carbon economy.

Regulatory Response

“The ongoing challenges facing the financial system are complex and multifaceted,” said a regulatory official. “It is essential that financial institutions prioritize operational resilience, cyber security, and climate risk management to ensure the stability and integrity of our financial systems.”

In response to these concerns, regulators have called for increased vigilance and proactive measures to mitigate these risks. Financial institutions must:

• Carefully manage technology risks
• Address legacy system vulnerabilities
• Develop robust strategies to adapt to a rapidly changing climate

By prioritizing operational resilience, cyber security, and climate risk management, financial institutions can ensure the stability and integrity of our financial systems.