Move towards a system-wide stress test reflects a global trend towards understanding and managing systemic risks
The Australian Prudential Regulation Authority (APRA) has announced plans to launch its inaugural financial system stress test next year. The test aims to comprehend the broader impacts of potential crises across banking, superannuation, and insurance sectors.
Speaking at the AFR Banking Summit, APRA chair John Lonsdale (pictured above), said the regulator is now considering both the design of the new system-wide stress test and how it might be rolled out.
“Our expectation is that the test would involve selected large entities and be conducted in stages, with a year for the design and a year for the exercise itself,” he said. “Later this year, we will be engaging with stakeholders throughout the financial system on the design of the test, focusing on exploring systemic risk hypotheses and potential scenarios.
“This process will involve our fellow agencies on the Council of Financial Regulators, as well as entities and industry associations.”
This initiative, according to Lonsdale, follows feedback from the 2023 stress test, which encouraged banks to broaden their stress testing to account for various risk factors.
The 2023 stress test scenario, simulating a global economic downturn with high inflation and interest rates, showed Australian banks could withstand significant adversity. Despite potential impacts on capital ratios and liquidity, the banks demonstrated capability for recovery, aided by strategies like capital raisings.
Lonsdale, however, called for enhancements in banks’ stress testing processes, emphasising the need for comprehensive governance, accurate modelling, and a wider perspective on risk sources. He pointed to interconnectedness within the financial system and external sectors as crucial considerations for future stress testing.
“This type of system stress test is at the cutting edge of regulatory best practice globally,” Lonsdale said. “While the US Federal Reserve has begun exploring broader market risk shocks as part of its bank stress testing program, it’s our peers at the Bank of England who have travelled furthest down this path to date. APRA has had several meetings with the Bank to understand its approach to the exercise and how it went about designing it.
“At this stage, our intention is to provide an update on our thinking before the end of the year ahead of rolling out the test in 2025.
“The size and complexity of the Australian financial system has grown significantly in recent years, as has the interconnectedness between industries. APRA’s regulated industries now have more than $9 trillion in total assets. It is in this context that APRA is planning to launch our first financial system stress test in 2025.”
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
