Speech
Managing Systemic Liquidity Risk
Brad Jones
Assistant Governor (Financial System)
Panel Participation at the ISDA/AFMA Derivatives Trading Forum 2025
Sydney
–
21 October 2025
Audio
37.9MB
Watch video: Panel participation by Brad Jones, Assistant Governor (Financial System) on 21 October 2025
Moderator
Well, first of all, thank you very much to Mark Bailey for hosting that panel. That was a very
interesting discussion. Now, the clue is in the heading, Managing System Liquidity Risk. That’s
what we’re about to speak to. Scott gave quite a few - a bit of a good, you know, setting for
this session in his - in his opening remarks. I’ll just go through a little bit of a scene
setter. A quick run through of who is on the panel and then we’ll go through some questions and
explore the subject. Scott obviously mentioned the growth in superannuation in this country has been
very substantial and clear the numbers are very large and getting larger and it won’t be long
before, at least the superannuation assets, exceed those of the banking sector. Liquidity has been
something that Australia has thought about in a formalised way over many, many years. In more recent
times we, as a country and authorities and so on, are turning our minds to understanding just how
banks and superannuation interact, I guess, through the concept of a liquidity event and understand
what that looks like in more detail.
We are delighted to have on our panel today Brad Jones, Assistant Governor from the RBA. Next to Brad
is Claire Thornton, Head of Treasury at AustralianSuper. Michael Clavin is next along the line, Head
of Income and Markets at Aware Super. And on the end there, Joanne Dawson, the Group Treasurer of
Westpac. Thank you so much. And I think maybe, Brad, if we can start with you and talk about the - I
guess the - it’s nothing new that the RBA and others are looking at liquidity. So maybe you can
get us started by what are the growing areas of focus in the RBA’s monitoring of liquidity risk
in the Australian financial system, please.
Brad Jones
Just a, sort of, high level conceptual framing I would say that the - our main area of focus is -
well, considering spending a lot of time, considering how the next war could be different from the
last. That’s really the high level conceptual framing that’s driving a lot of our work. If
I were to very crudely summarise, the solution to nearly every potential problem in the Australian
financial system for the last three or four decades, we simply had asked banks to hold more capital,
more liquidity and that was it. That sort of focus is no longer sufficient. And there’s really
two key changes that are driving this. One is the structure of the financial system is evolving in
really profound ways. And second of all, the nature of the risks that are barrelling down at us,
particularly from offshore, intense technological disruption, intense geopolitical disruption
there’s a couple of examples. Basically mean that our approach to thinking about liquidity risk,
systemic liquidity risk has to be a lot more expansive than it has been historically.
At a more concrete level we’re stepping up our analytical and operational focus on systemic
liquidity risk in a couple of dimensions. The first is our work relating to disruptions that could
affect the functioning of core financial markets, core funding and hedging markets that are critical
to the economy. Our sense is the most likely source of disruption in the global bond market.
That’s one piece of work. And separately, disruptions to institutions that basically move money
through the pipes of the Australian financial system. It’s not just about banks. It includes
financial market infrastructures, super funds, key entities involved in payments and so on. So the
sorts of scenarios that we and APRA - our colleagues at APRA have in mind now are much more expansive
than they were historically.
Moderator
Yes. There’s plenty to think about. And maybe staying with you, Brad, you’ve recently talked
about, I guess a new area - new era of where op risk and liquidity risk could interact in ways
we’ve not seen before. Maybe you can expand on that for us all, please.
Brad Jones
Yeah. This is the interaction between operational risk and liquidity risk is an example, one example
of how we think the future is going to be different from the past. And this is also partly reflected,
I should say, in APRA - in APRA’s recent focus on operational risk through CPS230 and
others. I think it’s probably fair to say that in times past operational risk was considered to
have very little, if any, connection to core financial risk. It was, sort of, this bucket of risk
that kind of sat over on the side. But as critical services are increasingly digitalised and
interconnected, as we saw overnight with AWS, our third party providers now are really key.
We can see at least two channels through which operational risk and liquidity risk could interact in
disruptive ways. The first would be through confidence effects. Where, for instance, you could see a
massive cyber attack or other operational disruption that basically undermines confidence in that
particular institution and can potentially set off a digital run. A second channel would be where a
major operational disruption, it could be a foreign adversary attempting to disrupt our payment
system or it could be a massive settlement failure at a key FMI disrupted the flow of money through
the pipes of the system. So they’re the two mechanisms.
We did see in April, what we think is probably a window into our future there. When a wave of
credential stuffing attacks were launched at super funds right at the same time that you - that we
saw significant pick up in financial market volatility around the time of the US tariff
announcements. That to us is a bit of a shot across the bow and we’re certainly leaning into
that. But I’ll just finish off by saying, I haven’t mentioned AI yet and I haven’t
mentioned quantum yet. Quantum is coming for us and so the bank, we’re doing a lot of work,
including with industry, to make sure we have a financial system here that is quantum ready.
Moderator
Okay. Thank you for that. Just for, I guess, edification of the group in the room here today, I think
about half the attendees would be from the industry super space, something like that, and lots of
banks, lawyers and so on. Liquidity has been around for a long time, you know, APS 210 banks and
so on. SPS 220 has been around for a while, where liquidity gets mentioned in the superannuation
framework.
(Panel discussion)
Moderator
Thank you. And I guess I want to talk about FX as a perfect point to come back to Brad as the guardian
of the Australian dollar, the implications. Are you able to comment on the - I guess the implications
for an FX market from the growth in super funds and their use of FX derivatives, the numbers there
are very large.
Brad Jones
Yeah. The first point I want to make for a bit of context, these are extremely deep markets. You know,
the Aussies are the sixth most actively traded market in the world, swap volumes are going to exceed
those in the spot market. We haven’t seen a need to intervene in the foreign exchange market
since 2008. So the context matters there. Our current assessment is we do not see systemic issues
today. COVID, I think, Claire was intimating, COVID was a live stress test. Industry got through that
period in reasonable shape. Though I’d add in part because many super funds didn’t have the
post margin on FX hedges. We’ve also observed a big uplift in the management of FX and liquidity
risk across the super fund industry since that time. Michael was alluding to that. I think in times
past a lot of funds basically just rolled one month forward. The suite of strategies that are now
being employed are a lot more sophisticated.
All of that said there’s a but coming and this is the but, it would be a, we think, a dereliction
of our duty not to be thinking about how that relatively benign current conjunctural environment
could evolve in the future. And to that I would say three things. First of all, the growth in foreign
exposure, asset exposure for this industry and the foreign currency implications of that, are going
to be very material. Vis-a-vis say the volume of bank offshore funding that’s being swapped back
into Aussie heading in the other direction. So there’s some interesting potential implications
over the long-term for supply demand imbalance there. The second thing is we also know, because of
the demographic profile, that there will be a relatively larger share of fixed income holdings from
our super fund industry over time. And the hedge ratio on foreign fixed income tends to be across the
entirety of the industry, about three times higher than for equities differs across individual funds
but that’s at the aggregate level. So there will be more hedging-related demand from that
evolution. And the third change is that margining and collateral requirements will also increase over
time, not just because the gross numbers are going up but also because of counterparty limits and
it’s quite reasonable to expect that foreign banks, standing on the other side of some of this
activity, might be inclined to offer less favourable terms than some of our domestic banks. So
there’s a few reasons as to why that system or those forces could change over the next five to
10 years.
Moderator
Okay. Thank you for that.
(Panel discussion)
Moderator
I guess, let’s all sort of reflect on the heading on the slide there. I know, Brad, you made a
couple of comments already and I’ll ask others to put their views in as well. I guess the key
question is, how prepared are we for a systemic liquidity event and what more do we think at this
point in time we need to, as an industry. We’ll start, maybe with Brad, and I’m happy to go
down the rest of the line, please.
Brad Jones
APRA have recently undertaken a system-wide stress test with their regulated entity. So I don’t
want to pre-empt what they might say. What I can say though is the starting position is certainly one
of strength. Larger banks have significant holdings of liquid assets. Our medium to smaller-sized
banks are thinking hard and not just about the size but the composition of their assets. Making sure
that they can raise liquidity, including through repo’ing them, rather than dumping them out in
the open market, which we think is important. I mentioned before, super funds are increasing the
sophistication of their liquidity risk management. Our FMIs and payment system are thinking harder
about big liquidity disruption. So all of that, as Jo alluded to is, I think, cause for some comfort.
That said, we all know through lived experience if there is a systemic shock, particularly one coming
from abroad, our financial system won’t be immune. And so we are doing a lot of work across
multiple domains to harden the system and prepare the system to be able to withstand very significant
disruptions.
What we are - where our mind is - is turning most acutely is to a number of shocks occurring
simultaneously. We’re not just thinking about isolated shocks. We’re thinking about a
number of shocks coalescing. And so with that in mind, if I can offer some free advice, you stress
test, reverse stress test very creatively. I don’t think that this should be the past will
repeat as a great guide, given my opening remarks, and we would really encourage industry to
challenge their core assumptions and make sure that those are robust because that’s really the
starting point for these sorts of exercises. So we’re in a good - we’re in a good place but
there’s absolutely no reason for complacency.
Moderator
Okay. Thank you for that. I remember in my former life sitting in a room with somebody talking about
the - you know, the Enron going bust as a stress event and people arguing, well, that would never
happen. And of course it did. I guess we’ll just very quickly get some other comments on the
same question, just down the panel. So, you know, how prepared are we and what more do you think we
need to do? I guess there’s a very positive message I think we are trying to get across here.
That this is a subject - that an issue that a lot of smart people are thinking about and that when
people go to do their jobs inside industry funds, you may not have an APS to attend but that
doesn’t mean you’re not thinking about liquidity. And you’re not living it every day
and sweating the detail. So - but having said all that, how do you feel in terms of, I guess,
preparedness for an event from the industry super side.
(Panel discussion)
Moderator
Okay. Well, thank you for that. We are just a bit over time. I guess the key message to leave is that
this is a terrific situation for the country. Lots of smart people thinking about the situation.
Applying the right lens. It’s a good situation to have. As you can see from the panel we are in
very capable hands going forward and AFMA is delighted to, sort of, help promote this conversation.
So please if I can ask the audience to say thank you to the panel and straight after this
there’s coffee out the back. So thank you for that.