AUSTRALIA’S financial regulator is planning a system-wide stress test to gauge the potential impact of shocks beyond the banking industry.

The Australian Prudential Regulation Authority (APRA) intends to launch the test in 2025 and then spend a year carrying out the exercise, chair John Lonsdale said in a speech to the AFR Banking Summit on Tuesday (Mar 26). The aim is to gauge the impact of unexpected events that can destabilise the financial system.

“The size and complexity of the Australian financial system has grown significantly in recent years, as has the interconnectedness between industries,” Lonsdale said. “The intention behind the new test is to sharpen APRA’s response to systemic risks by deepening our understanding of the transmission mechanisms.”

Lonsdale pointed to the November outage of telecommunications provider Optus as an example of the type of issue outside of the financial system that can have a spill-over effect. The crisis “demonstrated how even problems in non-financial services industries can spill over into the financial system”, he said.

The test would bring APRA to the forefront of regulatory best practice, according to Lonsdale, who identified similar efforts by the Bank of England (BOE). The BOE included banks, insurers, pensions and other financial market participants in its stress test that is due to conclude later this year, Lonsdale said.

“Whether it is 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,” said Lonsdale. BLOOMBERG

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