IMF asks Australia to ramp up stress tests on banks

The International Monetary Fund (IMF) has warned the Australian Prudential Regulation Authority (APRA) to increase the stress-testing of the major banks to ensure the sector could withstand deeper shocks caused by the global financial crisis.

The IMF, in its analysis on the Australian economy, said the Australian banks had escaped the worst of the financial system upheaval that has claimed some of the world's largest banks.

However, it warned that deteriorating asset quality and growing arrears from both retail and business customers could lead to higher banking distress over the next two years.

"Analysis of banks' exposure to the corporate and household sectors shows that banks are able to withstand potential losses from sizeable shocks to their loan portfolios," the IMF says in the report.

"These results should be interpreted with caution as they are not rigorous stress tests. APRA has regularly stress-tested the banking system but it would be advisable to undertake more extreme stress-test scenarios than applied in the past and include Australia's overseas subsidiaries," it added.

APRA said it believed the testing carried out now was extensive enough and the Australian banking sector had weathered the banking crisis in strong shape.