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Big super a boon for financial stability: RBA
The RBA’s most recent financial stability review report, released in September, warned that the significant growth of superannuation and its rising connectedness with banks had the potential to amplify shocks in the financial system.
But RBA governor Michele Bullock told Parliament last week that superannuation “is not a risk in the sense of the banking system” and that funds were also an important contributor to financial system stability.
“Often where financial stability risks arise is where you’ve got a bank that’s borrowed a lot of money – you saw this in the United States – and when people try to withdraw a lot of their money and the banks have borrowed against that, they often run into trouble because they can’t get enough assets to shovel out the door after the people,” Bullock told the senate economics legislation committee.
“But they are such a big part of the financial markets and hold so many assets that the question just is that, if there are, for example, ructions in financial markets – and we saw a little bit of this in the UK, it’s a different system there, but if super funds have to for example sell some assets to meet margin requirements then that can exacerbate the ructions in the market. It’s less about their leverage and more about how they’re managing calls on their liquidity and what the implications of those might be for markets.”
In the September report, the RBA warned that members’ or funds’ correlated reaction to a shock could amplify shocks in the financial system, as when funds increased their sale of debt securities back to issuing banks during the onset of the Covid-19 pandemic, adding to bank funding pressures which in turn increased funding costs across the financial system.
But, in the main, super funds are an instrument for stability in the system because their assets are so long-lived, Bullock said, and the RBA doesn’t see the need for a policy response in the near- to medium-term.
“Because super does have a longevity of it and people are restricted from withdrawing it, it isn’t a major risk from that perspective. But again, there’s the example of the UK… where what happened was there were problems in the financial markets, in the bond markets, there were margin calls made on the pension funds and they had to sell assets to meet those margin calls and that was exacerbating the problems in the financial markets.”
“The assets and liabilities of the super funds in Australia are reasonably stable, long-lived and matched; that’s positive for stability. But because it’s such a big part of the financial system now, it’s worth watching.”
The International Monetary Fund also issued a warning in October that super funds’ rising allocation to illiquid assets and members’ ability to switch products and funds at will could exacerbate financial system shocks, but Bullock clamped down on the suggestion that systemic risks could stem from illiquidity alone.
“What’s relevant here is that there are limits on how much you can withdraw from your super. Super funds are not subject to runs in the sense that banks are… super funds don’t work (like banks) – it’s not quite the same risk.”
That could change, Bullock said, if early access to superannuation was widened and liquidity demands on funds increased.
“If there was much more ability of people to take their money out of super, it does mean that super funds would have to have much more liquidity.”
