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Australia central bank developing top-down stress test framework

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Australia central bank developing top-down stress test framework

The Reserve Bank of Australia plans to develop a top-down stress test framework on the country's banking system following concerns over heightened threats to financial stability amid rising household debt and excessive property prices.

This will supplement bottom-up stress testing that is done regularly by the Australian Prudential Regulation Authority, the central bank said in a report released Oct. 13. The top-down approach, it said, can help explain disparities in results across institutions in bottom-up tests by applying the same set of parameters and assumptions. It can also "highlight the sensitivity of the overall system" to a change in parameters, among other things.

In its semiannual "Financial Stability Review," the central bank maintained its view that key risks to the country's financial system stem from high levels of household borrowing. The Reserve Bank of Australia also acknowledged that the move by regulators to tighten housing loans standards have helped ease the overheated property market.

The central bank said Oct. 13 initiatives taken by the regulators such as limiting the pace of growth of investor lending, discouraging loans with high loan-to-valuation ratios and limiting interest-only lending, have lessened growth in riskier lending.