Structural features of super funds, such as their long-term investment objectives and restrictions on borrowing to invest, mean they can be an important stabiliser for the financial system at times of stress, according to the findings of APRA’s inaugural system-wide stress test.

But they could also amplify the negative effect of shocks, largely due to their growing size and linkages across the system – particularly with banks – and their reliance on a small group of third parties to deliver critical services.

APRA’s stress test encompassed four large banks and six large super funds, representing around 70 per cent of the banking industry and 45 per cent of APRA-regulated super funds. Participants were asked to consider the impact of a “severe but plausible” shock in financial markets and the domestic economy, as well as an operational disruption.

The test found that, while funds were able to maintain enough cash and liquid assets to meet member switching requests and other obligations, they needed to make significant changes to their portfolios that had a “disproportionate impact on some members” through the denominator effect, where portfolios are left with a higher allocation to illiquid assets through the rapid sale of liquid assets.

APRA’s stress test is in part a reaction to heightened geopolitical risk, with the report noting that an “uncertain and increasingly fragmented international environment has contributed to periods of significant volatility and abrupt price movements in global financial markets”.

The most notable of these was in April 2025, as market participants reacted to US tariff announcements and the unwinding of longstanding trade policies, the report says.

“The initial aftermath saw equity prices fall sharply, sovereign bond yields rise, and global currencies, particularly the US dollar, fluctuate. Some measures of volatility in financial markets spiked to levels not seen since the start of the COVID-19 pandemic.”

While that episode was relatively short-lived, markets “remain vulnerable” to sudden corrections at a time when asset valuations are elevated and “uncertainty about the future is heightened”. Super funds, with around 50 per cent of their assets invested offshore, have significant exposure to fluctuations in global markets.  

“Geopolitical risks are challenging to manage because they can transmit through the financial system via many channels and trigger multiple disruptive risk events at the same time,” the report says.

“Some of those transmission channels and risks are well understood, but others are newer and unique to geopolitical events.”

The prudential regulator is also concerned about elevated levels of household debt and high house prices, with APRA chair John Lonsdale saying it was “carefully monitoring these risks and ensuring banks are prepared to implement additional macroprudential tools where required to reinforce lending standards”.

“The insights from our system risk outlook report confirm that Australia’s financial system is stable, resilient and well-placed to absorb shocks, but they also emphasise why we can’t be complacent,” Lonsdale said.

“International political and economic uncertainty remains elevated, which is why APRA is stepping up its focus on geopolitical risk.”