May 21 (Reuters) - Australia's financial regulator warned on Thursday that domestic private credit institutions are exposed to risks linked to global market developments and will require closer scrutiny.
In a report to financial institutions, the Australian Prudential Regulation Authority (APRA) said private credit remains relatively small in the country, but local institutions are still exposed to offshore pressures through multiple channels.
APRA added that it has intensified its oversight of banks,
insurers and superannuation trustees as geopolitical tensions, artificial intelligence and growing complexity in global financial markets continue to reshape the risk environment.
"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," APRA Chair John Lonsdale said.
Analysts have said that Asia-Pacific banks, including Australian lenders, may have to raise their near-term loan loss provisions as the Iran conflict darkens economic prospects in a region that's heavily reliant on Middle Eastern oil.
The country's top lender, Commonwealth Bank of Australia, has set aside more cash to prepare for risks linked to the conflict. The other three leading banks, National Australia Bank, Westpac and ANZ Group, have raised provisioning by A$757 million ($541.03 million) to cover potential bad debts arising from the war.
APRA said Australia's financial system remains well-positioned to support the economy during periods of volatility, with banks and insurers maintaining strong liquidity levels. Stress testing also showed the system could withstand a range of "severe but plausible" shocks.
($1 = 1.3992 Australian dollars)
(Reporting by Nikita Maria Jino in Bengaluru; Editing by Sherry Jacob-Phillips)
