The Australian Prudential Regulation Authority (APRA) says Australian financial institutions have faced a challenging environment this year as the global financial crisis spilled over to the Australian economy.

Chairman John Laker says in APRA’s annual report issued on Friday that supervisory intensity was “dialled to the highest level” as the domestic economic slowdown threatened to become a prolonged downturn with rising unemployment putting pressure on asset quality, profitability and capital.

“Australia’s progress has been supported by, and has in turn reinforced, the fundamentally sound condition of APRA-regulated institutions, notwithstanding two years in dangerous seas,” he said.

Dr Laker says Australia’s prudential framework has performed well during the global financial crisis and a “root and branch” review is not necessary and isn’t planned.

But global reform initiatives will have implications for this framework.

“For this reason it is critical that APRA be actively engaged in the reform process to ensure that Australian financial institutions do not bear the unnecessary brunt of global solutions to problems they were sufficiently prudent to avoid.

“The global insurance sector has not been immune from the crisis and… adverse equity market developments have had an impact on other APRA-regulated industries.

“Against this background, a prudential framework for conglomerate groups is taking shape and a review of capital standards in the life and general insurance industries is looking at the scope to harmonise these standards and improve their risk sensitivity.”