Australian Stress Testing

In the wake of the Global Financial Crisis, regulators have increasingly embraced enterprise-wide stress testing as a means to assess capital adequacy.

However, the regulatory response has been far from uniform across the globe. Australia in particular, enjoyed a smoother ride through the crisis, leading to less urgency and a slower ramp up in stress- testing requirements. The Australian Prudential Regulation Authority (APRA) has noted that there is still further work for the industry to do to improve stress testing practices.

As Australian banks continue to take steps towards more robust stress testing practices, there remains an open question: What regulatory stress testing regime is in the best interests of the Australian economy and at what cost? A balance must be found that satisfies the requirements for increased insight into the strength of the banking system, while managing cost and complexity.

In this point of view, we examine several key components of APRA's stress testing regime and discuss how Australia can learn from its global peers, who have learnt the difficulties of developing stress testing regimes and approaches under duress in crisis periods - the time to act is now, in a period of relative calm, before the next crisis hits.

Authors:
David Howard-Jones – Partner, Finance and Risk Practice
Ross Eaton – Principal, Finance and Risk Practice
Edward Emanuel – Principal, Finance and Risk Practice
James Gordon – Manager, Finance and Risk Practice