The Reserve Bank of Australia has told super funds not to expect the central bank to bail them out in periods of liquidity stress, but step up their own risk management practices especially given their increasingly large footprint in the Australian financial system.
Speaking at the Chair Forum on Thursday, hosted by Professional Planner sister publication Investment Magazine, assistant governor of financial system group, Brad Jones, said the RBA will not will always be there to cushion shocks and urge investors not to take risks with that assumption.
“Prevention, rather than cure, is where we would advocate attention being focused. It’s also the thing that you can control as an industry,” Jones told the forum attended by close to 40 trustee chairs in Sorrento, Victoria.
“Not putting yourself in a position where you have to rely on the presumption that someone else will bail you out of your position would be our advice.”
His comments came after the RBA issued a warning last September that funds have the potential to amplify stresses in the Australian financial architecture due to the explosive growth of their assets under management and their increasing influence on domestic banks – both through ownership of debt securities and equity holdings.
Regarding bank debts in particular, the RBA has already observed some early signs of concerns. It noted in the 2024 Financial Stability Review that funds directly hold nearly one-third of bank short-term debt securities, and that during the onset of the pandemic, funds ramped up the sale of debt back to issuing banks, adding to funding pressures for the latter and funding costs across the system.
“We think those [bank debt] holdings are largely being used in the liquidity pools of super funds,” Jones said.
“Our discussions with folks in the [super] industry is [about] making sure that people really understand the liquidity properties of those securities.
“The BBSW [bank bill swap] rate is a key benchmark on which a lot of other assets are priced in Australia, it’s a key reference rate. They’re the sort of [financial system] interconnections that have our attention.”
One attending chair questioned the RBA’s role in this type of liquidity crisis. “If super funds are compelled to redeem bank securities, they’re basically passing on a liquidity issue to banks, and behind the banks is the RBA,” they said under Chatham House rule.
“[That’s] what central banks are good at dealing with, and you have a mechanism there to engage you in it.”
But Jones said the RBA is aligned with prudential regulator APRA on this issue and urged funds to build up their liquidity management practices in a “very deliberative and careful way”.
Through industry engagement, Jones said the RBA noted significant efforts from super funds to perfect their liquidity management practices, but said the progress between different funds is “uneven”.
“We’d like to both raise the average level of sophistication and robustness around liquidity management and shrink the gap between the best and worst experience,” he said.
But Jones said superannuation’s growing influence is not all bad news. Thanks to its unique traits such as long investment horizons and a lack of leverage, the industry could act as a counter-cyclical, stabilising force in the financial system.
The sector has a growing need to invest overseas and the RBA estimated that funds’ foreign exchange hedging book stands at around $400 billion in the swap market. The central bank’s assessment is that current swap flows “are fairly well-balanced between what this community is doing and what other parts of the financial system are doing “.
Jones said the RBA will seek more engagement with the superannuation industry. However, the ultimate goal is not to predict when the next systemic risk will occur or what it will look like but improve the resilience overall.
“Because of the growth in the industry in particular over the last 15 years, it would be imprudent to just assume that [financial stability] will always be the case,” Jones said.
