Exploring vulnerabilities through reverse stress testing

Financial Stability Report November 2024 special topic article by Jonathon Adams-Kane, published 4 November 2024. Thirteen named banks participated against only the four largest in the 2016 exercise, each asked to model a plausible scenario that would breach regulatory minimum capital ratios within three years. Banks found that a severe scenario required either a large shock with adverse knock-on effects or a combination of shocks, geopolitical events were the primary cause of recession in 7 of the 13 scenarios, GDP declines ranged from 3 to 24 per cent, peak unemployment from 8 to 18 per cent and residential property falls from 30 to 55 per cent, with a three-year cumulative loss rate on impaired loans of 4.7 per cent on average; the regulator records that banks engaged broadly across the organisation including their board risk committees and that board members at some banks personally identified or reviewed the risks.