Front Matter Page

IMF Country Report No. 19/54

AUSTRALIA

FINANCIAL SYSTEM STABILITY ASSESSMENT

February 2019

This Financial System Stability Assessment paper on Australia was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on September 14, 2018.

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© 2019 International Monetary Fund

Front Matter Page

AUSTRALIA

FINANCIAL SYSTEM STABILITY ASSESSMENT

January 18, 2019

Approved By

James Morsink and Odd Per Brekk

Prepared By

Monetary and Capital Markets Department

• The FSAP team was led by Nigel Jenkinson and comprised Mustafa Saiyid (Deputy Mission Chief), Rachid Awad, Charles Cohen, Tumer Kapan, Peter Lohmus, Nobuyasu Sugimoto, Narayan Suryakumar, and Froukelien Wendt (all MCM); Yu Ching Wong (APD); Steve Dawe (LEG); and Timothy Clark, Graydon Paulin, and Heidilynne Schultheiss (all IMF external experts); and was supported by Moses Kitonga and Carol Franco (MCM).

• The team met with Australian Treasury Secretary Gaetjens; Reserve Bank of Australia (RBA) Governor Lowe; Australian Prudential Regulation Authority (APRA) Chairman Byres; Australian Securities and Investments Commission (ASIC) Chairman Shipton; as well as senior staff at these and other government authorities including the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Productivity Commission, and the Australian Competition and Consumer Commission (ACCC). The team also held extensive discussions with commercial banks, insurance companies, the Australia Securities Exchange (ASX), auditors, rating agencies, investment funds, real estate experts, and academics. The mission is grateful to all counterparts for their help.

• FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

• Australia is deemed by the Fund to have a systemically important financial sector according to SM/13/304 (11/18/2013), and the stability assessment under this FSAP is part of bilateral surveillance under Article IV of the Fund’s Articles of Agreement.

• This report was prepared by Nigel Jenkinson and Mustafa Saiyid, with contributions from members of the FSAP team.

Contents

• Glossary

• EXECUTIVE SUMMARY

• BACKGROUND AND VULNERABILITIES

• A. Macrofinancial Setting

• B. Key Risks

• C. Banking Environment

• D. Nonbank Financial Intermediaries

• E. Household Sector

• F. Corporate Sector

• G. Recent Developments

• FINANCIAL SECTOR RESILIENCE

• A. Credit Risks

• B. Liquidity Risks

• C. Contagion Risks

• FINANCIAL STABILITY POLICY

• A. Oversight Framework

• B. Macroprudential Policy and Tools

• C. Banking Supervision

• D. Insurance Supervision

• E. Financial Market Infrastructures

• F. AML / CFT

• CRISIS MANAGEMENT AND FINANCIAL SAFETY NETS

• FIGURES

• 1. Macrofinancial Cycle and Vulnerability

• 2. Financial System Structure

• 3. Banks’ Consolidated Cross-Border Claims

• 4. Nonbank Credit

• 5. Corporate Sector Debt-At-Risk

• 6. Solvency Stress Test Results – Major Drivers of Change in Capital Levels

• 7. Banks Under Liquidity Risk Scenarios

• 8. Maturity Structure of Banks’ Cumulative Cashflows

• 9. Australian Banks’ Linkages with G-SIBs

• 10. Cross-border Linkages and Vulnerabilities

• 11. Landscape of Financial Market Infrastructures

• 12. Indicators of Macroeconomic and Financial Market Conditions

• 13. Financial Soundness Indicators, 2017 Q4.

• 14. Comparison of Financial Soundness Indicators, 2017 Q4.

• 15. Banking Sector Detail, 2017

• 16. Real Estate Market Developments

• 17. Household Sector

• 18. Nonfinancial Corporate Sector

• TABLES

• 1. FSAP Key Recommendations

• 2. Solvency Stress Test Results

• 3. Risk Assessment Matrix

• 4. Selected Economic Indicators, 2014–24

• 5. Structure of the Financial System, 2017

• 6. Financial Soundness Indicators for the Banking Sector

• 7.Status of Key Recommendations of the 2012 FSAP

• APPENDICES

• I. Banking Sector Stress Testing Matrix (STeM)

• II. Key Macroprudential Policy Measures, 2014–18

• III. Report on the Observance of Standards and Codes (ROSC)

Glossary