The exercise assessed the resilience and responses of the country's five largest banks to two severe but plausible scenarios involving geopolitical risks.
"Recent developments in global trade policies have heightened the importance of evaluating banks' resilience to geopolitical shocks," says Director of Financial System Assessment, Kerry Watt.
In the first scenario, banks model the impact of a recession triggered by a breakdown in trade, disruption to global supply chains and instability in the geopolitical environment. The scenario saw bank capital ratios fall significantly. While capital remained above the minimum regulatory requirements, it would take some time and significant actions to restore them to current levels.
In a second scenario, each bank faces a cyber-attack triggering a severe outflow of retail deposits to other banks and closure of wholesale funding markets to the affected bank over three months. This is against the backdrop of the recession described in Scenario 1. Bank capital was depleted further but remained above regulatory minimums. Banks' liquidity buffers were sufficient to meet the cash outflows. However, their liquidity ratios fell significantly with some banks requiring mitigating actions to remain above the regulatory minimum. The recovery period takes longer with the additional liquidity stress, leaving banks at a disadvantage to peers. The results can help inform banks' preparedness for managing a combined stress of their solvency and liquidity, a new feature of this year's test.
In Scenario 2 the overnight borrowing facility of the Reserve Bank is important in managing a sharp liquidity shock and providing stability to the financial system. However, since this is not a committed facility, banks could consider using more mitigating actions, particularly in a scenario where other financial entities are not under liquidity stress.
"The exercise provides valuable insights for both participating institutions, the Reserve Bank and the wider financial system, helping to build our capability and preparedness to manage complex risks," says Mr Watt.
More information
Assessing banks' resilience to geopolitical risks: 2025 bank industry solvency stress test results
