The Chairman of banking regulator APRA has declared the 10 largest Australian banks would survive a major financial crisis as he unveiled the results of the body’s “banking stress test”.
In timely comments made at the Australian Financial Review Banking Summit on Tuesday, John Lonsdale explained the “dire scenario” modelled by APRA involved setting interest rates at 4.5 per cent, increasing the unemployment rate to 11 per cent, and inventing a 43 per cent decline in national house prices.
It also assumed the banks would be shut out of wholesale funding markets and, in a reflection of similar recent events, that they would be hit by a “major and costly cyberattack.”
“We hope the day never arrives when the type of dire scenario used for our banking stress test eventuates,” Mr Lonsdale said.
“But should it do so, Australians can be confident of two things: their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements.”
Despite the extreme pressure applied to the system under the regulator’s modelling, all 10 of the banks involved remained above the minimum capital level, with safe funding and liquidity positions. In short, deposits remained protected and households would be spared from a complete loss of savings.
In a further boost, APRA said its stress test assumed none of the banks took mitigating actions to prevent loss of capital, whereas in reality they would have taken steps to prevent losses which could have further shielded customers from the impact of such dire economic conditions.
The findings are likely extremely welcome to both bankers and households as global turmoil caused by the collapse of Silicon Valley Bank threatens to worsen an already uncertain economic climate.
Mr Lonsdale was quick to highlight the different standard of regulation applied in Australia to that facing banks overseas as a key reason for the resilience displayed in the stress test, but warned no country was completely immune from overseas instability.
“As a mid-sized economy, with a population of only 26 million, our banks depend on access to international markets to meet their wholesale funding and capital needs,” he said.
“No matter how resilient our financial system, what happens globally affects us to a greater or lesser extent.”
He added that APRA had been in contact with other regulators in Europe and the United States following events in the last two months, in addition to local meetings with the Council of Financial Regulators.
“They’ve been very useful forums in understanding what others are doing, learning lessons, and really getting in front of any issues,” he said.
“There is a lot of work globally and domestically about what are the lessons. The speed at which money moved within the system is something you cannot ignore, and you have to think about the prudential settings you have.
“As the speed of crises has accelerated, regulators have less time to respond than they once did.”
Although the news was generally positive for Australia, Mr Lonsdale did flag concerns that financial institutions were not doing enough to address cybersecurity threats.
He suggested there was a “lack of rigour in the nature and frequency of security control testing,” which needed to be overcome in the face of “constantly evolving” cyber risks.
“Given recent cyber breaches affecting a broad number of Australians, boosting cyber resilience remains one of APRA’s top priorities,” he said.