The prudential regulator has written to insurers, banks and superannuation funds setting out minimum expectations for managing geopolitical shocks, after indentifying readiness gaps.

Australian Prudential Regulation Authority chair John Lonsdale says awareness is not enough and the letter is a call to action.

“As a mid-size trade-exposed economy, Australia will always be impacted by what happens in the rest of the world – and right now the rest of the world is becoming more volatile and unpredictable,” he said.

“We need to see APRA-regulated entities integrate geopolitical risk into governance, risk management and crisis preparedness practices to strengthen their readiness for geopolitical shocks.”

APRA has become more concerned in recent years about the potential for financial system impacts stemming from geopolitical shocks such as trade restrictions, sanctions and wars.

It says agencies on the Council of Financial Regulators have seen gaps in how awareness are translating into practical risk management and crisis preparedness.

APRA’s letter sets out minimum expectations for readiness in six key areas, including enhancing preparation for non-financial and non-traditional risks such as foreign interference, insider threats or cyberattacks connected to geopolitical developments.

Expectations also focus on preparation for traditional financial impacts through capital and liquidity planning, plus investment stress testing for scenarios such as market closure, sanctions and funding stress.

“Where APRA identifies heightened exposure, weak governance or inadequate preparedness, we will take appropriate supervisory action to address these gaps,” Mr Lonsdale said.

Challenges include the way artificial intelligence adoption is changing the global cyber threat landscape.

The regulator says many boards are still developing technical literacy, while reliance on critical third parties, often overseas, makes it more difficult to assess, mitigate and manage risks.

APRA will soon write to a group of larger entities with heightened exposure to geopolitical shocks, asking them to complete a targeted readiness assessment, with a focus on crisis preparedness, personnel risks and political risks.

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