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Macrofinancial Stress Testing on Australian Banks

Author

Listed:
  • Nicholas Garvin

    (Reserve Bank of Australia)

  • Samuel Kurian

    (Reserve Bank of Australia)

  • Mike Major

    (Reserve Bank of Australia)

  • David Norman

    (Reserve Bank of Australia)

Abstract

Macrofinancial stress testing is a tool to help policymakers better understand the key systemic vulnerabilities in a financial system. The Reserve Bank of Australia's (RBA) macrofinancial bank stress testing model is an example of this, enabling the RBA to analyse potential financial risks to Australia's banking sector, such as those arising during the COVID-19 pandemic. The model projects how economic shocks may influence a bank's profitability, dividends, loan growth and capital position, primarily using decision rules and accounting identities that are uniformly applied to profit and balance sheet data for the nine largest banks operating in Australia. It is designed with a focus on understanding systemic vulnerabilities and a philosophy of prioritising transparency over complexity. The key advantages of this model are its ability to quickly produce estimates of the capital loss in response to various macroeconomic scenarios, model various forms of contagion across banks, and allow the modeller to undertake 'reverse' stress tests. The paper sets out the key features of this model, how it was used during the past two years and the areas in which further work is required.

Suggested Citation

  • Nicholas Garvin & Samuel Kurian & Mike Major & David Norman, 2022. "Macrofinancial Stress Testing on Australian Banks," RBA Research Discussion Papers rdp2022-03, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2022-03
    DOI: 10.47688/rdp2022-03
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    banks; stress testing; Australia;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F01 - International Economics - - General - - - Global Outlook
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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