APRA’s latest System Risk Outlook highlights resilience as geopolitical and technological risks intensify

The Australian Prudential Regulation Authority (APRA) has intensified its oversight of banks, insurers and superannuation trustees as geopolitical tensions, artificial intelligence (AI) and growing complexity in global markets reshape the risk environment.

The update is contained in the latest edition of APRA’s System Risk Outlook report, which provides an overview of risks and vulnerabilities affecting the financial system from the perspective of Australia’s financial safety regulator.

Coming at a time of elevated uncertainty globally, today’s report reinforces Australia’s financial system is well-prepared to withstand a range of severe downside scenarios, including a deep global recession combined with higher funding costs and operational disruptions.

Other key insights include:

• Australia’s financial system is well-positioned to support the economy if conditions deteriorate in the current volatile environment. Banks and insurers remain well capitalised and have strong liquidity positions, while stress testing shows the system can withstand a range of “severe but plausible” shocks. To maintain resilience in an environment of heightened uncertainty, APRA has intensified its oversight of entities and sharpened its expectations for sound risk management.
• AI is being adopted rapidly across all regulated industries, but governance arrangements have not matured at the same pace. At the same time, cyber threats are becoming more sophisticated, including from advanced AI models. APRA recently reinforced its expectations for sound AI governance and risk management via a letter to industry.
• Although private credit remains relatively small in Australia, risks are growing internationally. Australian institutions are exposed to offshore developments through multiple channels, creating potential spillover risks that warrant close monitoring.

APRA Chair John Lonsdale said that while our financial system remains strong and stable, heightened vigilance is needed to keep it that way in a turbulent global political and economic environment.

“Strong capital, liquidity and prudential safeguards mean our financial system is well-positioned to absorb shocks and continue providing critical services to households and businesses, even if economic conditions deteriorate.

“Sustaining that resilience, however, will require ongoing investment in strong risk management across the system.

“Among the areas we are most focused on are rapid developments in AI, which are outpacing the ability of many entities to manage the risks, and potential impacts on Australia’s financial system flowing from the war in the Middle East and other geopolitical volatility.

“Moving forward, we will continue to assess how APRA-regulated entities are being impacted by overseas events and how well prepared they are for a range of potential downside scenarios, as well as seeking further uplift in cyber security capabilities and AI governance,” Mr Lonsdale said.

Today’s full report is available at: System Risk Outlook - May 2026

The next edition of the System Risk Outlook will be published towards the end of the year.