Speech Fireside chat at Conexus 2025 Superannuation Chair Forum

And we move now to have, for the very first time, the Reserve Bank of Australia. Dr Brad Jones, thank you for being here. Now, I must say we’ve learnt there are some institutional trappings involved in having the RBA at this event. We have some cameras up the back, which I understand are for the purposes of your own self-assessment, or the Bank’s. We have Bloomberg News in the room, as discussed at the outset. So, clearly, there’s a chance that the things you can say can move markets, and so on. So perhaps we should start there with the very big picture. If you could give an update, please, to the room what are the risks, as the RBA sees it, to financial stability and the outlook for shocks, to the extent they exist?

Thanks, name redacted, and fantastic to be here. Let me answer that by giving a sense of the sort of framework we’re using to think about this issue. Thinking about risks in two different ways, there’s one group of risks that we think of as being fairly standard, cyclical business cycle risks that are generated from within the financial system. They’re the sorts of risks that we’ve observed, basically, since the dissolution of the Bretton Woods system, the last 50 years. We’ve got pretty well developed playbooks for monitoring and responding to those types of risks. Then there’s a second class of risk, which is newer, more structural rather than cyclical, and bearing down on us from outside the system, not being generated from within the financial system, and for which there’s not very well developed playbooks. So there’s sort of two very different parts of threats. On the first, we’ve done a lot of work examining the health of borrowers and the health of lenders, and trying to trace through the ability of borrowers to withstand different economic conditions and what the implications of different scenarios would also be for lenders. And our really quite consistent assessment during this period of policy tightening has been that, on the main, Australian households and businesses have been resilient. Resilient in the sense of being in a position to repay their debt obligations on time. That is not to say that households and businesses, that are a decent cohort, have not diminished the fact that a cohort of those firms and households have been experiencing stress. We’ve seen that play out in a macroeconomic context, in the form of lower consumption, business insolvencies rising, calls to help lines, for instance. So there’s absolutely been stress. We just haven’t seen that metastasise into a big rise in non-performing loans, for instance.

On that second category of risks, the assessment is, frankly, a little bit more problematic. So these are non-traditional risks that are coming at us from outside the system. What I’m speaking about there, in particular, through -- one is geopolitical risk, second is operational risk, and a third is risks around climate change. On the geopolitical risk side, the framework we’re bringing to bear here is to think about this issue along a continuum, a spectrum of risks. Not just anchoring to one particular scenario, but in fact a range of possible scenarios. We’re now working with systemically important institutions in the country to ensure that they are robust to a range of potential geopolitical scenarios.

On the operational risk side, our colleagues, APRA, have been leaning into this space in a pretty concerted way. The CPS 230, APRA and the Bank are also working together very closely on issues like how to build resilience in our payment systems. That’s been a key priority.

On the climate side, there’s been a whole range of initiatives, again, across all of the Council of Financial Regulator agencies to try and get our arms around that one. The stress testing, disclosures, standards and so on. So, pulling all that back, two very different types of risks required two very different sorts of responses from policymakers.

The final point I would just make is that trying to predict when the next shock will hit and what it will look like is incredibly difficult. So, a lot of our time is also spent focusing more on the resilience piece. That is, focus a little bit less on the prediction business, a little bit more on tracing through how robust are our institutions, and can they withstand a range of shocks? That’s where a lot of our focus is on.

Well, certainly there’s some lived experience in the room of active management and trying to predict where the market will go. So, that will resonate. If we could just stick with the geopolitical risk for a moment and, Brad, you described that as a new-ish or an emerging structural risk. But of course, you know, geopolitics has been with us since we’ve been mobile, right, the middle ages, and we’ve had to contend with those sorts of risks. Why is this a growing focus as a central bank? Why is this sort of external or geopolitical risk having a growing influence on the financial system?

So, I’d say the last 80 years have been a historical anomaly, which I think is the point you’re trying to make. It is the period, though, over which people in this room and, in fact, basically the entire financial system, have tended to -- well, we’ve all been educated over that period. Risk management capabilities have been developed over this long period -- unusually long period of peace. So, in some sense it is a reversion to a more contested world, a type of world that, in fact, prevailed for many centuries. It’s just our systems and our processes have not been developed in a way that has necessarily taken into account international political economy risk. It’s just not featured prominently at all, certainly for most of the last 30 decades. I should acknowledge, though, just in the last couple of years, that’s starting to shift, and we’re now finding much more engagement when we’re speaking to institutions about this issue. Financial institutions are leaning into this in a way that, perhaps, they didn’t. They’re bringing expertise from that domain into their own operations. So, there’s been some progress, but there’s some ways to go, I think, before large institutions would feel entirely comfortable that they’ve been able to develop the right sort of framework to navigate this sort of an issue.

So, all three of those, to some extent, speak to a more active role for government, I guess, both in democratic countries and non-democratic countries. If you look at the commentary coming out of Davos last week, you would think that, you know, the appointment of Donald Trump, the election of Donald Trump was the most momentous thing to happen to financial markets in a very, very long time. Does the bank have a view about that? Is that really in the realm of normal share market volatility and political and media noise, or does the bank have a view about the extent to which what’s happening in America could be a financial system change?

There’s a lot of imponderables in that question, I think. We don’t spend a lot of time trying to second-guess what a particular administration is going to do. In part because what matters is not just what any particular government in any part of the world is going to announce, but what the second and third order responses were going to be. So, for instance, one country might decide to impose tariffs. What really matters for the global financial system then is how do other countries respond to that. So, the second, third order effects are very difficult to trace through. So, we don’t waste too much time on that. I mean, we’re alert to it. We’re obviously following events closely. We speak to our international counterparts very frequently, but we’re not second-guessing.

Okay. So let’s come to the superannuation. Obviously, the central bank is not a corporate or a prudential regulator. You have made some public comments, picked up very strongly by the financial press and, of course, noted by the people in this room, around super more recently. Perhaps it would be worthwhile to just clarify the extent to which the bank is monitoring super, or what you see as your role, really, as it pertains to super?

The industry, as has been noted in the earlier panels, it’s grown tremendously, and it’s at 150% of GDP. It would really be, the way we think about it, a dereliction of our duty to not be engaging with the industry. So, in the last couple of years, in particular, we’ve stepped that up. There’s been a bilateral element to that. A number of bank executives have engaged with a number of folks in this room, and there is also the ASFA that’s reached out to us and is now helping to establish, at different levels of our organisation, frequent touch-points. So that engagement is building.

The way that we’re thinking about super and the way that we’ve written about it recently is to really make two key points. The first point is that there are important structural features of our industry which distinguish it from some of those internationally. Conceptually, that should mean that this industry is very well placed to act as a counter-cyclical stabilising force in our financial system: long investment horizons; the fact that member returns are not guaranteed; the lack of leverage; the lack of run risk. That’s the conceptual sort of underpinnings for that assessment.

But because of the growth in the industry, in particular over the last 15 years, it would be imprudent to just assume that will always be the case. So we’ve commenced a program of work -- and we’re working closely with our fellow regulators here -- to think through different scenarios where you could potentially have a multitude of shocks come together and trace through what would this mean for the system at large.

If I can give you one tangible data point around how things have changed, at the time of the global financial crisis, super funds collectively owned about 5% of short-term bank debt in the country. Today, that figure stands at somewhere between 35 and 45%. So I think this room is quite justified in pointing to the counter-cyclical role played in the GFC, right, that’s empirical fact.

But again, it would be imprudent for us just to assume that things will play out in the next shock, whenever it may occur, in precisely the same way, because there have been key changes in the industry and there’s a larger degree of interconnectedness in the system because of the growth in the industry. That means that the systemic implications could be larger than they were certainly 10 or 15 years ago. So, that’s what’s sitting behind some of the analytical work we’re now doing.

A lot of our analytical work, I should say, is very focused on the role of a systemic liquidity shock. That was so generated from outside the system where super funds inadvertently became a propagator of that stress. I think David used that terminology earlier. That resonates with us, because the framework that we’re bringing to bear here is not that super will be the originator of a shock to the financial system, but rather, there’s a shock imposed on the financial system. How could -- think through -- how could funds inadvertently propagate stress through the system? And that could be through a combination of you have some large market shock, which undermines confidence writ large. You also have a change in policy settings, unexpected change in policy settings, which means the system is no longer closed in the way that it has been for almost its entire existence. And then maybe there’s some big cyber attack. So you have multiple shocks coming together. How would that trace through, given that the interconnectedness in the system is much higher than it was 15 years ago during the global financial crisis?

So that’s where some of our analytical work is focused.

You mentioned some of the plausible scenarios there, cyber risk, for example. Is one of those that you are looking at, scenario modelling, around the growing preponderance of private credit assets? This is one that the IMF and others have pointed to. Perhaps there’s some bubble-like activity starting to emerge. Is that one of the scenarios that superannuation maybe a propagator of, or perhaps pension funds more globally?

We have long focused -- had a program of monitoring non-bank lending behaviour in Australia. Non-bank lenders in Australia account for about 10% of business lending and about 5% of mortgage lending. That share has ebbed and flowed a bit. In the business side it’s certainly increased a few percentage points. It’s not yet of a scale -- in the numbers that we have, it’s not yet on a scale that would suggest to us that there’s systemic implications.

What is happening instead is that our colleagues at ASIC and APRA are very focused on issues like transparency and valuation of assets and investor protection. That’s where the regulatory focus has been, I think quite rightly, up to now. Now, if this space continues to grow, you can bet your bottom dollar we will be running the rule over it. Right now, the way that the regulators are thinking about this is this is principally an investor protection issue. But if it continues to grow, the interconnections between that part of the financial system and other parts of the financial system continue to grow, then we will be leaning in.

And worth noting, of course, that some funds are, indeed, direct lenders in these arrangements in increasing cases. The other one that has received quite a lot of attention from the RBA’s comments is around bank ownership or, indeed, the role of super as a funder of or provider of services to the banking system. We’ve heard a little bit of that through this morning’s commentary. Is there anything you’d want to say about clarifying any areas of concern you have there, or the extent to which the RBA is looking at this?

Only really to repeat that this point around growing interconnectedness in the system between the super funds and the banks. We’ve seen it play out most evidently in a super fund holdings of bank debt, where we think those holdings are largely being used in the liquidity pools of super funds. So, I know APRA are looking closely at this. In our discussions with folks in the industry, it’s making sure that people really understand the liquidity properties of those securities. We saw, for instance, at the start of the pandemic there was a big increase in sales of bank debt securities being put, basically, back to the banks. We hadn’t really observed that before. That’s the sort of -- when I talk about interconnectedness and how stress could propagate, given that bank bills, the BBSW 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 interconnections that have our attention and that we’re doing work on. It’s more through that wholesale funding market lens than others.

So, less around the equity ownership, for example --

Yes.

-- which seems to have captured the conversation a little. Another one raised in that body of work that the bank did was around herding and benchmarking in the behaviour of funds in their investment markets. Now, to advocate, I suppose, for the funds in the room, some of that, largely, of course, is the result of financial regulation, and specifically the Your Future, Your Super regime introduced by the previous government which, arguably, encourages some of that herding behaviour. Putting that to one side, why is the herding behaviour potentially problematic?

Well, everyone standing on the same side of the boat is not great. To be a bit flippant about it, I don’t want to get into a commentary on the role of -- on the validity of those benchmarks or not. I know that they’re periodically reviewed. But synchronised shocks, synchronised behaviour -- and it doesn’t matter what part of the investor ecosystem that behaviour is coming from -- if everyone’s trying to act in a similar way at the same time, that’s generally when you get market discontinuities.

Yes, and perhaps not as periodically as some in the room would like. But I guess beyond super, this concept of herding is obviously a major trend influence in financial markets globally over the last few years. If you look at the rise of passive investment which, on the one hand, has arguably moved money from Wall Street to Main Street, to some extent, but also there’s, perhaps, more herding activity going on. At a financial system level, separate to what super funds might be doing, is that something that central banks are really looking at; the rise of ETFs and the fact that there’s less price discovery, for example?

I would say that, internationally, central banks are always thinking about how could we get really disruptive events in our financial system? I think that’s really the concept that animates a lot of research. The issue that you’re speaking to is one of the items on a long list of things that central banks worry about. I wouldn’t say it’s at the top of the list.

We specifically in the last session, Brad, had a diversity of funds in terms of their size, some of the largest megafunds in the system, and also the number of the smaller funds that remain. Does the RBA have a view at all about concentration of retirement savings among a small number of sort of an oligopoly style model, as we have with retail banking, versus a diversity of players from a financial system and health point of view? Does that dynamic matter?

Just for the avoidance of doubt, we don’t sit around at the bank pontificating about what the right number of super funds should be. That’s not what we do. At a conceptual level, the challenge here is how do we develop or operate a system? How does a system operate where you get the benefits that can accrue from having high levels of sophistication rigor, at the same time not have two or three or four institutions completely dominate.

Now, to provide the appropriate perspective, the levels of concentration in the super fund industry are far lower than in other parts of the financial system and other parts of the Australian economy. If you look at the big banks, for instance, their share of credit is somewhere between 70 and 75 percent. I think the big four super funds by assets maybe represent something in the order of 25 percent.

So, to the extent there is industry concentration, it’s not as pronounced, I would assert, in this industry compared to other parts of the financial system and other sectors of the economy more generally.

Another area where certainly the exposure is less pronounced, at least in the Australian system, is the exposure of super funds to digital assets and crypto assets is relatively tiny. In fact, I think there’s only one fund in the room who has at least a public disclosure to that asset class. But I know that the RBA has had a bit to say about this in different realms. Governor Michelle Bullock has been, let’s say, relatively skeptical, I think it fair to say, about the idea of cryptocurrency, as both a currency and as a potential asset class. That’s how I would have read her comments.

But I know you’ve been doing some work, both inside the RBA and with some other global organisations, on this growth of digital assets, which we’re now seeing very much back in the mainstream conversation through the US election, and so on.

Can you give us a sense to which the bank, or yourself personally, are watching this, and the extent to which investors in the room should be really watching closely what’s happening in this emerging space?

The future of money is one of the five strategic priorities for the bank. So, this is absolutely an area that we’re very focused on. What I can say clearly here is that we do not see a compelling use case for unbacked crypto. We do make a big distinction between unbacked crypto and the potential for digital assets, tokenised assets, to quite profoundly transform the nature of our financial markets. As an adjunct to that, we’re thinking very hard about what forms of money, new forms of money, digital money, might be needed to act as the settlement agent in these transactions in digital assets. That is why we’re interested in central bank digital currencies, essentially.

Now, to be clear, we’ve yet to -- we at the bank and the payment system board -- have yet to see a compelling public policy case emerge in favour of a retail central bank digital currency. The benefits aren’t obvious to us. We can certainly see scope for massive disruption in the financial sector, potentially. So, we haven’t seen the risk reward trade-off from a public policy perspective in the case of retail, CBDC, emerge yet. I would say most central banks are coming to that view. There’s a couple that are still moving in that direction, but they’re in a minority at the moment.

Where most of the interest internationally, and certainly at the RBA, is in this space is thinking about the role that a wholesale central bank digital currency could play in acting as the settlement agent for transactions in digital assets and tokenised assets. That’s really where most of our attention is.

What problem does that solve, potentially?

Yes. So you can think about the evolution of financial markets since World War II as having had -- have been a couple of epochs. One was the paper-based system, the next was electronification. And the third, potentially, is this era of tokenisation. The reason that central banks are looking at this, and industry is looking at this, is there’s a few potential benefits. Now, all of these come with some hair over them. So, there’s no settled view internationally or at the bank that this will happen or that this is inevitable at all.

But the types of benefits, potentially, that could accrue from, say, atomic settlement, which is where you have the digital asset and the former digital money on the same exchange, basically exchanging instantaneously, is the rule of T+2 collapses to T+0. So you remove counterparty risk. You remove the issue of having to tie up your collateral for 48 hours waiting for your transaction to settle.

Tokens also hold out the promise of being able to be updated from an information perspective in real time. For instance, one of the use cases for the issuance of, say, green bonds is that the token could be getting live feeds on clean energy production, and coupon payments could be made on the basis of that real-time information coming in. So collateral, freeing up collateral, reducing counterparty risk. Also cutting through layers of intermediary costs, because you’ll basically be cutting the middleman out of transactions. So, there’s some transactions, for instance, in the securitisation market that involve 12 intermediaries. Everyone’s taking their cut along the way. So, tokenisation could potentially cut through some of those layers.

Then there’s the argument that it could help facilitate 24/7 trading on DLT, for instance, and the fractionalisation of assets; chopping assets into smaller pieces could help improve liquidity. They’re all the arguments for why you might want to look at this and do some work in this area. They’re some of the reasons why we are, but I should underscore that there are some issues with digital assets, so we’re taking a pretty sober perspective as we’re running the ruler over this.

Yes. Those are self-evident, right? We’ve seen many, many investors around the world, tens of thousands of them in Australia alone, lose money in the collapse of FTX, and certainly there’s issues around the regulation, or lack thereof. Nonetheless, it sounds as though you, the bank, believes, and perhaps other global peers, that there is some utility in the blockchain itself?

Yes. The underlying technology is interesting to us. I think certainly much more so than the unbacked crypto space, which is the piece that gets a lot of the media attention.

Okay. We’re going to open to questions from the floor now, so please be forthcoming. And also, if you wish to share any lived experience of conversations your boards have had around these issues, please feel free. A question or a comment from Table 2. If we could get him a microphone, and please give your name and organisation. Just press the button.

Name redacted. Brad, thanks, indeed. A really wonderful presentation. On this issue of super funds holding 40% of short-term bank securities, and the difficulty this might lead to in a liquidity crisis, or let’s say a circumstance where members wanted cash, or given the opportunity to take their assets as cash, as they were during the GFC, to a limited extent, can this not be regarded, actually, as quite a good facility? That is, in a liquidity crisis, if super funds are compelled to redeem bank securities, this becomes, basically, passing on a liquidity issue to banks, and behind the banks is the RBA. In other words, it’s a mechanism for transferring liquidity crisis solution back to the RBA, which is where it should be. That is, it’s not an insolvency crisis, it’s just a liquidity crisis -- it’s what central banks are good at dealing with -- and you have a mechanism there to engage you in it more properly than you might otherwise?

I think it would be very difficult for any central bank to advocate for investors taking risks in a way that would mean that if there’s a big shock, the central bank will be there to bail them out. I think what we would prefer, and certainly what APRA would prefer, is that institutions are building their liquidity risk management capabilities in a very deliberative and careful way, so that they can accommodate a range of potential shocks that also take into account the possibility that some of their peers might act in a similar way. So, prevention rather than cure is where we would advocate attention being focused.

It’s also the thing that you can control as an industry. So, 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 there. And to be fair, since the pandemic, we have observed the super fund industry making -- certainly parts of the industry -- making efforts to increase the sophistication of their liquidity risk management practices. APRA has also acknowledged that, at the same time acknowledged that that progress has been very uneven, and that 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, because I think one thing that we’ve picked up from our liaison is that there’s some institutions are now doing this very well, and there’s others where maybe their practices are still a fair way short of where they should be from a prudence perspective. So, prevention trumps cure.

Certainly an important message there. We’ve got another question from Table 2 and then a few more around the room.

Hi, Brad. name redacted. A really interesting piece of work was done by the BIS about three months ago where they tried to grasp trading relative to geopolitical risk. You may have seen the work. I asked your Deputy Governor about it at the IMF meetings we had and subsequently used in the presentation in November to discuss it. The bank seemed pretty careful about it, but Australia really is an extreme outlier; ie, on that measure of the BIS, we have very high exposure to geopolitical risk relative to our trading position. The bank itself also has a very low level of FX reserves, you know, one times inputs. It always has done it that way.

We obviously have to manage our FX volatility. It’s a very important part of the way the industry works, particularly as the industry gets bigger and invests more offshore, holds unlisteds. You didn’t mention FX. How are you thinking about that?

Yes. Great question. It’s featured in some of our research publicly, and it’s also an active area of work for us. Again, a part of that really reflects that the size of the super fund FX hedging book stands at about 400 billion in the swap market. The FX market is a core market for central bank operations, which is another reason why we’re doing work in this area, and we’ve spoken with a number of super funds about their FX hedging practices; how are you managing. The margin core risk that comes with FX hedging, because of the growth in offshore assets and the fact that around 40%-ish of those asset holdings are currently hedged, those trends are likely to continue to mean that the activity from this community in the FX swap market is going to grow. So, we’re looking at it, actually, through a couple of perspectives. One is the potential for very large moves in foreign exchange markets to accompany these other market stress events and accelerate or perpetuate the call on liquidity in a stress event. So, that’s one angle. Then there’s also the other element of just outside of stress events, the fact that this community here will become, almost certainly, a larger and larger player in the FX swap market. What implications does that have for market functioning and fundamental supply and demand imbalances in the normal course of events?

Right now, our assessment is that flows through the swap market are fairly well balanced between what this community is doing and what other parts of the financial system are doing. That may not necessarily be the case in perpetuity, and so that’s another area where we are doing a lot of work in this space.

It’s worth noting as well that names redacted spent quite a bit of time in the report in front of you dealing with this issue of FX risk. There is a question from Questioner now on Table 6.

Brad, just to add to that discussion on FX, one thing we found really interesting is in that downward market environment, with funds allocating more offshore so they run a hedge book for currency, if there is a market shock and the Australian dollar falls with markets, funds actually find themselves overhedged, so they’re actually selling AUD into a market where AUD is falling. And we have estimated that that could add 5% to flows in a difficult market environment, and it’s interesting. Is that a number that sort of raises your eyebrows, or it’s nothing too significant to worry about? It’s quite interesting.

I haven’t seen those numbers, so I’d have to pull them apart to be able to respond to that. But what I can say is there’s two ways to think about this issue. One is the initial magnitude of a decline which brings the margin call piece into play, but then there’s the length of the decline. What we know from speaking to super funds is, particularly in recent years we’ve seen greater use of, say, laddering in the hedging strategies. So, not the entire hedge book is rolling every month; it’s being staggered. So that, in theory, offers some protection or some sort of mitigation against the most extreme effects of margin calls.

But the longer that decline is sustained, obviously the larger the decline, the longer it’s sustained for, the larger the cash flow implications.

You mentioned right at the outset there are some ways in which our pension system markedly differs from others. One of those, of course, is the sort of default compulsory nature of contributions. Some critics would say that that has led to a complacency, or perhaps an under-estimation of the need to have liquidity on hand. And we saw a little of this, right, during the pandemic with the early release scheme, albeit relatively a small amount of funds actually withdrawn then.

We are now heading into an election cycle where there are, potentially, more use cases for withdrawal in Australia for the purposes of purchasing homes, and so on. So, as this conversation increases, do you think the super industry should be more prepared for people to be switching, for people to be withdrawing their funds?

Certainly our colleagues at APRA are engaging very closely with the industry, as I said, to make sure that across the industry that there’s less unevenness. There’s a high average level of capability here on liquidity risk management, and it’s more even.

The pandemic was, I think, a big shot across the bow. The early release scheme I think caught a number of institutions off guard, and in a number of conversations we’ve had with the industry, the sense we’ve got is it could have been worse. The withdrawals -- there were certainly states of the world where the withdrawals could have been larger than what they actually were. And if those worst case scenarios had played out, the events could have been a bit more problematic for super funds. There’s been, I think, a lot of learning and reflection on that period and an increase in capability. And you see that now in the types of people who run higher into running liquidity risk management operations at super funds which we think, all else equal, is a good thing. So, there’s definitely been an uplift. It’s on the radar not just of the investment teams, but boards, which we think is great. But there’s a maturation that needs to happen there.

Well, certainly I think I speak for the room when I say the industry would welcome engagement with the Reserve Bank, and we certainly do at this forum. So we hope that it be a long-term thing.