The prudential regulator has put banks and insurance companies on notice to improve their risk culture or face "greater supervisory intensity".
The Australian Prudential Regulation Authority (APRA) says the financial sector needs to pay greater attention to risk, warning that many institutions are "grappling" with how to best improve their risk management.
In an information paper released this afternoon, ARPA chairman Wayne Byres told institutions the regulator would step up surveillance if needed.
"APRA cannot regulate sound risk culture into existence," Mr Byres said.
"However, APRA will apply greater supervisory intensity to institutions that are either unwilling or unable to address behaviours that are inconsistent with prudent risk management practices."
APRA will also review the remuneration policies and practices of institutions it supervises to determine what role salary and incentives play in risk culture.
The information paper describes remuneration frameworks as "important barometers and influencers of risk culture."
The review will also examine the arrangements and outcomes for some senior executives and "material risk takers" at a sample of financial institutions.
APRA's review comes as co-regulators like ASIC (Australian Securities & Investments Commission) investigate banks and insurers over alleged unethical or unlawful banking behaviour.
Last week, ASIC released a report on the life insurance industry showing a high level of rejected claims for total and permanent disability (TPD) and trauma.
ASIC is also investigating the scandal at the Commonwealth Bank's insurance arm CommInsure as revealed by an ABC Fairfax investigation.
The chief executives from the major banks were grilled by a parliamentary committee a fortnight ago as the federal government continues to rebuff calls for a Royal Commission into the banking sector.