APRA announces system-wide stress test

The Australian Prudential Regulation Authority (APRA) has announced that will be conducting Australia’s first financial system stress test in 2025.

In a speech APRA’s chair John Lonsdale delivered at the AFR Banking Summit on Tuesday (26 March), it was revealed that the “interconnectedness of the modern financial system” has led to the launch of the system-wide test.

The regulator said that the new test aims to discern the impacts of “spillover and amplification risks” and to identify “‘blind spots’ in [APRA’s] supervisory regime”.

Lonsdale said that the findings from the system-wide test may inform its future ADI stress testing, including “future exploratory and industry-specific exercises”.

The chair highlighted in his speech that the modern banking system has expanded significantly, spanning across a variety of industries.

He noted in particular the unexpected impact of the Optus outage in November 2023 and its flow-on effects on banks and their customers.

Lonsdale said that banks could be doing more in their individual stress testing, aside from APRA’s scenario tests, to protect themselves from future risks.

The chair commented: “Banks, too, have more work to do in expanding the scope of their stress testing capabilities to incorporate a broader range of factors to ensure they’re prepared to respond to financial or operational threats, wherever they arise.

“As part of their internal risk and capital management, we also expect banks to do their own stress tests using their own scenarios.

“What we have seen is banks using the scenarios presented by APRA as a heavy source of inspiration. As flattering as that might be, we see potential for banks to widen the lens they take on the potential source of future risks, especially spillover shocks emanating from other sectors.”

2023 ADI stress test results

The announcement of the financial system stress test followed on from APRA’s recent 2023 authorised deposit-taking institution (ADI) stress test.

APRA’s 2023 ADI stress test found that all ADIs tested had enough capital to withstand a significant global economic downturn.

The regulator found that banks were able to continue to meet their liquidity obligations.

APRA tested banks’ ability to withstand an inflation peak of 8.6 per cent and an increased cash rate.

The regulator assumed that this combination of factors would reduce house prices by 35 per cent and see unemployment rates rise to 10 per cent.

While the banks saw significant credit losses in this scenario, they were able to restore their capital levels toward targets once taking mitigating actions, according to APRA.

The banks increased capital raisings by $37 billion during the hypothetical downturn, which was a key strategy used by the banks.

[Related: Banking chaos amid Optus outage]