Australia's banking regulator will test lenders, pension funds and life insurers next year against an economic shock driven by artificial intelligence, after warning on Thursday that AI is speeding up cyber attacks and that 80 of the 100 biggest service providers to the firms it supervises are based offshore.

The Australian Prudential Regulation Authority set out the plan in its twice-yearly System Risk Outlook, published on Nov. 12. For investors in Asia who hold Australian bank shares and bonds, the report sets out where the supervisor of the country's largest lenders sees trouble coming from: global bond markets, technology suppliers that many institutions share, and a housing market that has started to fall.

APRA Chair John Lonsdale said the financial system remains resilient, but “the risk environment is becoming less forgiving,” according to a statement accompanying the report.

APRA's 2027 stress test turns to AI

The regulator said its 2027 System Stress Test will explore how AI-driven disruption could affect banks, superannuation funds, life insurers and the wider financial system. It will use severe but plausible scenarios of two kinds: rapid AI adoption that breaks some business models, or a sharp markdown in AI-related asset values.

APRA said frontier AI models, including those from Anthropic and OpenAI, are showing more advanced abilities to find software flaws and work out how to exploit them. Major U.S. technology companies have reported a sharp increase in public disclosures of vulnerabilities since April, the report said. That could leave banks and their suppliers less time to patch systems and contain attacks.

The report also gave numbers from data collected under APRA's operational risk standard, CPS 230. Among significant financial institutions, the typical bank named 52 material service providers, the typical insurer 28 and the typical superannuation fund 23. Some individual providers support institutions that together account for more than half of APRA-regulated financial assets. Insurance Business Australia reported the same figures on Thursday. APRA said it expects a fuller picture once the data collection is formalized.

In June and July, APRA and the Australian Securities and Investments Commission held nine industry roundtables on frontier AI involving more than 380 entities and 600 attendees. The regulator said it does not regulate AI technology itself, but will press institutions to show that they are identifying and managing the risks.

Bond yields, private credit and Australian banks' funding

Long-term government bond yields in advanced economies are close to their highest levels in at least 15 years, APRA said, and a rapid further rise could trigger a disorderly adjustment. Australian banks continue to raise money at relatively favorable margins and rely less on offshore funding than in the past, the report said, though it warned that a large or prolonged market move could test that position. Capital Times has separately covered Australia's 10-year bond yield.

Large technology companies building AI infrastructure have more than doubled their corporate bond issuance this year, according to the report. APRA cited an OECD estimate that AI-related transactions made up 34% of global private credit deal values in 2025, up from 9% in 2024.

Australia's own private credit market is estimated at A$250 billion, less than 4% of the size of the banking system, and is concentrated in real estate rather than technology. APRA pointed to the recent insolvency of a large property developer backed by many private credit funds, and to temporary limits on investor withdrawals at some funds. Private credit makes up around 2% of superannuation funds' total assets, and banks' direct exposures remain small, it said.

The regulator's first System Risk Stress Test found that all participating banks and superannuation funds withstood the market and liquidity shocks examined.

Housing prices down 6% since March

National housing prices have declined by about 6% since March and are back around mid-2025 levels, APRA said, as higher interest rates, tax changes and weaker sentiment cut demand. Housing credit growth has slowed, particularly for investors, though it remains above its long-term average. Capital Times has separately covered Australian home values in October.

Most borrowers have room to cope. APRA cited Reserve Bank of Australia estimates that less than 2% of variable-rate owner-occupier borrowers have a cash flow shortfall and less than 1% of all borrowers owe more than their home is worth. Mortgage arrears have risen but remain low.

The weak point is debt. Aggregate household debt is around 180% of disposable income, high by historical and international standards, and APRA said the risk to stability would grow if a sharper fall in prices coincided with a substantial rise in unemployment or tighter credit. Its limits on high debt-to-income lending, introduced in February, remain in place.

Preliminary results from a joint stress test with the Reserve Bank of New Zealand, the first since 2017, showed that the five largest Australian banks and the four largest New Zealand banks kept lending through a scenario combining regional geopolitical escalation, an oil price shock, a deep recession, a funding shock and a cyber attack. APRA called it the most severe bank scenario it has run.

APRA said it will publish detailed findings from the trans-Tasman test later this year, after it has discussed the results with the participating banks.