Rhizome Advisory Group

Australian Prudential Regulation Authority has published its priorities for the next 12 months. Many are multi-year regulatory and policy initiatives (CPS 230, Cyber Risk, etc.). In terms of those that have not commenced, there is one very large initiative in the plan that entities should be preparing for ahead of APRA's engagement with entities. This is APRA's first system stress test to understand risk transmission mechanisms between regulated industries and across the financial system. Banks have experience and built capability by participating in ADI industry wide stress tests run by the regulator. However the focus of this stress test will be different to those run in the past. For other industries this is going to be a new experience. Entities should be thinking about their capabilities (systems and resourcing) and capacity to run these along with BAU activities. #australia #privatecredit #superannuation #banking #insurance https://lnkd.in/g-JqqpBp

Rhizome Advisory Group’s credit risk specialists will be publishing a series of risk insight articles exploring the risks and opportunities for private credit investing as it relates to the superannuation industry. In this first article we provide an overview of the asset class and the imminent risks. Later articles will explore what Responsible Superannuation Entity Licensee directors and executives should be asking to ensure that they are challenging and testing their approaches to credit assessment and investment. We look forward to your thoughts, opinions and questions as we explore this asset class in our series of articles. #riskmanagement #creditrisk #investments #superannuation #australia https://lnkd.in/gNHJWgNR

Australian Prudential Regulation Authority has released observations from its recent survey of unlisted asset governance practices, highlighting that asset valuation practices are a 'heightened supervision priority for APRA'. In this Insights piece, we dive into next steps for Executives staring down the barrel of FAR at RSE licensees and superannuation trustees. #riskmanagement #superannuation #investmentrisk #australia https://lnkd.in/gxZJqfjR

Australian Prudential Regulation Authority has released observations from its recent survey of unlisted asset governance practices, highlighting that asset valuation practices are a 'heightened supervision priority for APRA'. In this Insights piece, we dive into next steps for Executives staring down the barrel of FAR at RSE licensees and superannuation trustees. #riskmanagement #superannuation #investmentrisk #australia https://lnkd.in/gxZJqfjR

Hot off the press is Australian Prudential Regulation Authority's eagerly anticipated operational risk management guidance in CPG 230, complete with an excellent summary of key updates and changes. Go beyond the summary with our new insights on the intersection of CPS 230 and FAR and how to shift gears from managing risk to embedded endurance . #regulation #riskmanagement #australia https://lnkd.in/gv9v_wYf

ASIC has published the results of its review of hardship lending practices. Despite multiple warnings from the regulator including an open letter to CEOs, a number of lenders are still failing borrowers that are experiencing financial hardship. Please see our recent Rhizome Risk Insights Article on our website www.rhizome.com.au where we ask executives and directors to consider a number of questions. CALL OUT FOR APRA REGULATED BANKS- A very important statistic was highlighted in the ASIC report, "..40% of cases where payments were reduced or deferred, customers fell into arrears right after the assistance period ended. In a third of cases the customer was given another hardship notice within three months of the assistance ending". ASIC's seems to conclude that it was the result of poor customer contact by Lenders prior to the concession period ending. However this should raise prudential concerns from an Australian Prudential Regulation Authority perspective regarding the correct recording of non-performing loans especially where multiple hardships have been granted within a 12 to 18 month period. More analysis is needed by ASIC to determine whether it was solely due to poor communication by lenders or that the borrowers should not of been given hardship in the first place. It is becoming evident that the banks are caught between ASIC's consumer protect and Australian Prudential Regulation Authority's safety and soundness of financial institutions mandates. How do lenders respond? https://lnkd.in/gRmsKe6g

Credit risk alert fatigue - Since the pandemic, risk functions, particularly credit risk managers have been on high alert and anxious about the potential for defaults and losses. It appears borrowers weathered the impact of the economy being shut down during the pandemic, helped by governments and central banks providing unprecedented support (preventing defaults and insolvencies from occurring). Many have emerged with higher levels of leverage on their balance sheets and cashflows adversely impacted by higher operating costs and rapidly increasing interest rates that remain at peak levels. Through all this, credit portfolios in particular commercial lending portfolios in Australia have continued to remain resilient (i.e. defaults and losses). Whilst lenders remain on alert, could alert fatigue set in and desensitise risk functions and executives, leading them to miss, ignore or rationalise signs that risks are building and not act at the worst point in the credit cycle? Lenders have targeted management of costs / cost out programs with increasing pressure on credit risk oversight resources and activities. This is combined with the need to reallocate resources from the management of financial risks to non-financial risk initiatives and regulatory change.  How confident are executives and boards that latent risks and blind spots are not growing in their portfolios? Despite credit risk management being a well-established practice (compared to some of the newer risk types), there are often cases of lenders with high conviction / confidence in the quality of their lending practices and controls during periods of benign conditions (low default history) eventually being caught out when conditions deteriorate, and significant losses eventuate. In these instances, material weaknesses were identified when it was too late.   We often find that internal Line 2 credit portfolio reviews have built in biases of the organisation or have approaches that require enhancement and Line 3 independent reviews often take an audit or process compliance approach to credit risk management rather than identifying and challenging the underlying assumptions in the way credit risk strategy, appetite and portfolios are constructed and whether credit approval and exposure management are truly effective.  The weaknesses are only identified and realised by management and boards after the losses start coming through the door. Lenders will need to continue to ask themselves whether they are being rigorously challenged about the quality of their credit risk management practices. #riskmanagement; #creditrisk #insolvency https://lnkd.in/giNeMhmg

Australian Financial Complaints Authority has reported a 25% increase in complaints about how banks handle financial distress. It noted that more than half of the complaints were about a lender's failure to respond to a request for help. With this in mind, Rhizome Advisory Group poses a series of questions we think all leaders should consider now and on an ongoing basis. Please click on the link below to our insight article. Regulators will be closely scrutinising how financial firms respond to customers facing difficulty – whether in hardship applications or collections activities; whether conduct towards the customer, forecasting and modelling or in their analysis and systems for predicting and reporting for non-performing loans. Getting it wrong is not only a compliance risk, but an enormous reputational risk.  https://lnkd.in/gNEwdcqP

Australian Financial Complaints Authority has reported a 25% increase in complaints about how banks handle financial distress. It noted that more than half of the complaints were about a lender's failure to respond to a request for help. With this in mind, Rhizome Advisory Group poses a series of questions we think all leaders should consider now and on an ongoing basis. Please click on the link below to our insight article. Regulators will be closely scrutinising how financial firms respond to customers facing difficulty – whether in hardship applications or collections activities; whether conduct towards the customer, forecasting and modelling or in their analysis and systems for predicting and reporting for non-performing loans. Getting it wrong is not only a compliance risk, but an enormous reputational risk.  https://lnkd.in/gNEwdcqP

Australian Prudential Regulation Authority published its commercial property lending statistics on ADIs for the quarter ended 31 December 2023. Rhizome Advisory Group has summarised the key takeaways in the charts below. Key points: 🔔 APRA has identified a slowing growth in total committed exposures (noting 3.4% yoy) is "expected to put increasing pressure on ADI's performance". Our chart below calculates the growth rate differently using total committed exposures in Australia. This measure is materially higher at 6.4% yoy. Whilst growth has slowed from peak levels of 13.3% yoy at June 2022, total committed exposures continue to grow despite growing concerns about the underlying fundamentals for the sector. 🔔 Office exposures declined 1.55% yoy in Dec 2023 - negative annual growth was last recorded in 2011. Interestingly, loan exposures to retail property grew by 6.1% yoy despite concerns about valuations, declines in rental income and vacancies for this segment. 🔔 committed exposures for residential development is stable reflecting the challenges impacting project feasibility and construction quality and solvency. The data also reflects the narrative in the press that new supply is not growing whilst significant demand exists. It might be easy to say that developers and lenders should be funding more projects and that now is a good time to change risk appetite to "expansionary" settings, however there are other factors at play that is constraining the ability to allocate more capital to this segment. These include limited supply of truly feasible projects that provide sufficient return for developers and cash flow buffers that are commensurate to the risks, high land costs, higher construction costs, and development restrictions. 📢 The data published by APRA is solely for ADIs. It is unclear whether a tightening of underwriting standards by ADIs is resulting in transactions being funded by superannuation funds and other non-bank lenders that will have down stream impacts on other stakeholders. That is, are deals that failed bank underwriting standards funded by superannuation funds with weaker underwriting standards? It is important that executives and directors at superannuation funds have appropriate credit risk management frameworks and practices for commercial real estate exposures which leverages the lessons learnt from previous commercial property lending. Will Peterson #riskmanagement #creditrisk #housing #australianproperty