APRA warns financial system faces mounting risks

Australia's financial system remains resilient, but rising global market pressures, artificial intelligence, AI-related vulnerabilities and growing interconnectedness could test institutions' capacity to withstand multiple shocks, according to the Australian Prudential Regulation Authority (APRA).

In its November 2026 System Risk Outlook, the regulator said banks and insurers remained well capitalised, while household and lender buffers had helped absorb weakening housing market conditions. However, it cautioned resilience could not be taken for granted as uncertainty persists across global financial markets.

Long-term government bond yields across advanced economies are near their highest levels in at least 15 years, driven by elevated government debt, geopolitical tensions and inflation expectations. APRA warned a further sharp rise could increase funding costs and reduce investment values, with potential spillovers across the financial system.

The regulator also highlighted emerging risks associated with AI, including increasingly sophisticated cyber threats and greater dependence on shared technology providers. Of the 100 largest material service providers reported to APRA-regulated institutions, 80 are headquarter or principally operate overseas, creating potential channels for widespread disruption.

APRA said it was intensifying supervisory engagement on AI-related risks and improving its visibility of system-wide dependencies and its 2027 System Stress Test will examine how AI-driven economic disruption or a sharp reassessment of technology valuations could affect banks, superannuation funds and insurers.

Private credit also remains under scrutiny as the sector expands. While Australia's market is estimated at $250 billion, or less than 4% of the banking system, APRA said overseas stress, concentrated exposures and weaknesses in governance, valuations and liquidity management warrant closer monitoring.

Meanwhile, national housing prices have fallen about 6% since March, although most households and lenders remain supported by accumulated equity, repayment buffers and sound lending standards.

APRA said institutions must strengthen crisis preparedness, ensuring financial and operational responses can be coordinated when multiple disruptions occur simultaneously.

"Australia's financial system remains strong and stable, supported by financial buffers and operational resilience initiatives. The system has managed the pressures experienced to date, but persistent uncertainty and the possibility of multiple shocks occurring at once mean this resilience cannot be taken for granted," APRA said.

"Maintaining resilience requires financial strength, operational readiness and crisis capabilities that work together under pressure."