APRA plans first financial system-wide stress test
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The news: The Australian Prudential Regulation Authority (APRA) has started planning its first financial system-wide stress test, the regulator's chair John Lonsdale announced in a speech at the AFR Banking Summit today.
The context: Later this year, APRA will engage with stakeholders throughout the financial system on the design of the test, focusing on exploring systemic risk hypotheses and potential scenarios. The consulting process, which is scheduled to conclude later this year before rolling out the test in 2025, will involve fellow agencies on the Council of Financial Regulators, as well as entities and industry associations.
Lonsdale said that this type of system stress test "is at the cutting edge of regulatory best practice globally". The US Federal Reserve has begun exploring broader market risk shocks as part of its bank stress testing program, while last year the Bank of England launched its first system-wide exploratory stress test exercise including banks, insurers, pension funds as well as other financial market participants.
The APRA chair noted that before that gets underway, the regulator would spend the next month engaging with participating banks on the 2024 authorised deposit-taking institutions (ADI) stress test, which will be conducted from mid-May to the end of July. He noted a major factor contributing to the need for banks' stress testing to take a more system-wide view was the rise of superannuation as an economic force.
What they said: "Whether it’s a bank shock in the US spreading to Europe, as we saw last year, or a virus spreading globally, an increasingly interconnected world requires greater awareness of linkages and potential exposures across the financial system," Lonsdale said.
"That includes connections with parties that may not provide financial services, but which are essential for those services to be provided.
"In developing a system-wide stress test, APRA is seeking to contribute to greater understanding of these linkages and how they could spill over or amplify a potential future shock."
The source: APRA
