Key considerations for banks and superannuation funds

APRA’s system wide stress test

April 01, 2025

The Australian Prudential Regulation Authority’s (APRA) upcoming system-wide stress test presents a significant opportunity for Australian banks and superannuation funds to put processes, policies and systems to the test. Learning from the outcomes of the Bank of England’s System-Wide Exploratory Scenario (BoE SWES) can provide useful insights to set participants up for a high quality process and outcome.

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Stress testing plays a crucial role in assessing the resilience of financial institutions. Regulators are also broadening this focus to consider the interconnected nature of the financial system and the associated risks.

The Bank of England (BoE) recently completed its System-Wide Exploratory Scenario (SWES) exercise, a new initiative designed to assess the resilience of the United Kingdom (UK) financial system to a severe market shock. The Australian Prudential Regulation Authority (APRA) is set to conduct a similar stress test in 2025, focusing on Australian banks and superannuation funds.

The BoE’s SWES took a system-wide approach to stress testing, incorporating complex firm behaviours and active engagement of firms across different finance sectors to identify mismatches in firms’ expectations of how they will act under stress and enhance risk management strategies across the system.

The SWES scenario was a hypothetical stress event comprising a sudden, sharp and severe shock to global financial markets, triggered by the crystallisation of geopolitical tensions running over a period of ten days. This shock was designed to be faster, wider-ranging and more persistent than those observed in recent stress episodes. This scenario was different from the regular BoE capital stress test as it sought to understand the actions that would be taken by participants given a set of circumstances instead of the capital resilience of banks.

The SWES exercise focused on three key transmission channels to understand how stress propagates through the financial system:

Drivers of firms’ liquidity needs under market stress
Firms’ actions in response to those liquidity needs and the liquidity available to them
Additional actions taken to deleverage, reduce risk exposure or rebalance portfolios.

APRA’s Chair in a recent speech identified four potential risk transmission channels of interest:

The impact of a crisis on supernannuation fund liquidity and how trustees might respond to any shortfalls.
The impact on banks’ liquidity due to large outflows from institutional counterparties.
Banks’ ability to rely on superannuation as a source of capital in time of stress.
The impact of asset markets from banks’ and superannuation trustees’ synchronised responses to the stress.

APRA has mentioned ‘severe but plausible’ scenarios that include market shocks from geopolitical events, trade tensions, and technological vulnerabilities. APRA’s mention of capital considerations suggests they may examine bank strength in more detail than the BoE, who specifically state that it was not their intention to do this. The BoE also did not specifically include an operational risk incident, but asked participants to reflect on how this would have impacted their analysis.

Our full summary of considerations for banks and superannuation funds ahead of APRA’s upcoming system-wide stress test considers key lessons from the BoE SWES and questions to help you prepare to participate in Australia’s first system-wide stress test.

Download the full summary

APRA’s system-wide stress test: Key considerations for banks and superannuation funds

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