Cyberattacks and climate change could have dire consequences for the Australian economy and livelihoods if governments and businesses fail to understand the risks, the Reserve Bank warns.
“Risk is not a dirty word for banks. Banks’ core business is managing risk,” the RBA’s Jonathan Kearns, head of financial stability, said on Thursday.
But the nature of risk was evolving, he told the Australasian Finance and Banking Conference.
“The financial risks from climate change are clearly systemic as climate change will affect the portfolios of all banks,” Dr Kearns said.
“Cyber risk need not be systemic. It could affect only one bank, but if that bank is large and interconnected, or the cyberattack affects a critical node in the financial system, it could very well become systemic.”
The Australian Cyber Security Centre received 13 per cent more reports of cybercrime in 2020-21 than the previous financial year, with a larger share being classified as severe.
“Given the large number of cyberattacks on Australian banks, it’s not really a matter of if there is a major cyber breach but when,” he said.
“Cyber risk is a type of operational risk, which has actually existed for some time.”
Despite new ways of paying and operating, he said banks faced the same four core risks they had faced for decades or even hundreds of years: credit, market, liquidity and operational risk.
Credit risk is the risk most often talked about, and its significance grew with the onset of the pandemic as banks expected large losses and rising bad debts.
“As it turns out, losses have been, and are expected to remain, much smaller because of much better than expected economic conditions and direct fiscal payments to affected households and businesses.”
He said environmental, social and governance risks were getting greater attention, driven by investors.
The physical effects of climate change, ranging from severe storms, bushfires or more extreme temperatures or rainfall, could reduce crop yields or tourism revenues.
The transition risk to a less emissions-intensive economy could mean losses from changes in policy, technology and behaviours, here or overseas.
A Climate Vulnerability Assessment led by the Australian Prudential Regulation Authority is being run with the five largest banks to quantify and price climate risk, with results due next year.
Dr Kearns said upcoming capital reforms would better allocate capital to risk by adjusting risk weights, improve flexibility by increasing the capital in buffers, and make it easier for banks to absorb losses.