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Aussie banks pass stress test
Stress testing within major banks globally was revealed to be vastly inadequate during the GFC, but Australia’s majors have emerged largely unscathed and with a far better understanding of what is required from internal stress testing for the future, according to Australian Prudential Regulation Authority (APRA) chairman John F Laker.
In a speech to the Australian Business Economists recently, Laker said the crisis itself was far more severe than the scenarios that were tested and stress-testing practices globally were replete with weaknesses.
“Growing recognition of the need for robust stress testing means banking institutions around the globe are seeking to enhance … their stress-testing frameworks and practices, and a number of supervisors have now conducted their own industry-wide stress tests,” Laker said.
Based on discussions between APRA and Australia’s major banks following a self-assessment of the banks’ compliance, several areas of better practice have been identified — as well as areas for improvement.
Laker said that stress-testing scenarios applied at an enterprise-wide level were typically well communicated within institutions. He added that stress-testing scenarios were updated on a regular basis and were responsive to the changing economic environment; and at the enterprise-wide level, a range of risks other than credit risks were considered and potential correlations between risk classes were recognised in the aggregation process.
Further development could include the extension of regular stress-testing regimes to the more detailed portfolio and product level, and upgrading information and IT systems to support stress-testing exercises and reduce pressure on resources, he said.
“APRA’s recent stress-test has provided important evidence that the Australian banking system has the capital resources to weather an economic contraction much worse than that expected during the depth of the global financial crisis,” Laker said.
AUTHOR
Mike Taylor
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