APRA's First System-Wide Stress Test Shows Both Resilience & Emerging Financial Vulnerabilities

Key Takeaways

• Cross-Sector Stress Test Completed: APRA conducted its first System Risk Stress Test examining how Australia's banking and superannuation sectors interact during severe financial stress.
• Financial System Proved Resilient: All participating banks and superannuation funds remained resilient under an extreme scenario and successfully rebuilt liquidity during the test period.
• Super Funds Play A Dual Role: Superannuation funds can either amplify liquidity pressures through funding withdrawals or strengthen financial stability by providing equity capital during broader banking stress.
• Systemic Vulnerabilities Identified: APRA highlighted concentration risks, differing behavioral assumptions and reliance on shared service providers as areas that could magnify future crises.
• Policy Changes Will Follow: The findings will inform proposed revisions to bank liquidity requirements and future supervisory priorities for both banks and superannuation funds.

Deep Dive

For decades, prudential stress testing has largely asked whether an individual institution can survive a severe economic shock? The Australian Prudential Regulation Authority decided to ask a more complicated one. What happens when the connections between institutions become part of the crisis itself? The answer, according to the regulator's inaugural System Risk Stress Test published Tuesday, is cautiously reassuring.

Australia's largest banks and superannuation funds remained resilient under a scenario that stretched well beyond recent experience, though the exercise also exposed vulnerabilities that grow more important as the country's retirement savings system becomes an increasingly dominant force in financial markets. The exercise, conducted during 2025, brought together Australia's four major banks and six large superannuation funds in APRA's first attempt to examine systemic risk across sectors rather than within them.

While the regulator has long relied on industry-specific stress testing, this was its first assessment of how the behavior of banks, superannuation funds and critical service providers might interact under extreme pressure. APRA deliberately constructed a scenario that pushed institutions beyond historical precedent. Banks were required to model liquidity pressures greater than any experienced by Australia's largest lenders over the past half century. Superannuation funds faced member withdrawals and investment switching that substantially exceeded the surge seen during the COVID-19 pandemic.

Complicating matters further, the scenario assumed an operational disruption affecting a material service provider, introducing another channel through which stress could spread across the financial system. Even under those assumptions, every participating institution remained able to absorb the shock and rebuild its liquidity position during the testing period. That outcome was only part of what interested the regulator.

The exercise underscored that superannuation funds are no longer simply large institutional investors operating alongside the banking system. Their decisions increasingly influence how stress develops across it. The same fund that withdraws financing from a bank already facing liquidity pressure can intensify that strain. Yet during a broader downturn, the willingness of those funds to provide equity capital can have the opposite effect, supplying stability precisely when banks need it most. That dual role emerged as one of the central findings of the exercise.

The Vulnerabilities Beneath the Resilience

The stress test also identified weaknesses that would not necessarily appear in a traditional institution-by-institution review. APRA pointed to concentration risks, inconsistent behavioral assumptions across firms and common dependence on major service providers as vulnerabilities capable of amplifying future crises. Those issues become more consequential as Australia's superannuation sector continues to grow.

The regulator noted that a relatively small number of very large funds now hold enough influence that their responses during periods of market stress could have significant consequences beyond their own members. At the same time, demographic change will steadily reshape liquidity demands as more Australians transition from accumulating retirement savings to drawing pension payments, increasing the operational demands placed on funds during periods of market disruption.

The exercise also revealed differences in preparedness. APRA concluded that superannuation funds need to strengthen their ability to model severe stress events in line with their expanding systemic role. Banks, while more experienced in liquidity stress testing, were also found to have opportunities to improve their own capabilities.

APRA Chair John Lonsdale said the exercise reflected the reality that decisions made in one corner of the financial system increasingly affect institutions operating far beyond their own sector. He said understanding how superannuation funds respond under severe stress has become essential as the sector accounts for a growing share of Australia's financial system. While the results demonstrated that participating banks and superannuation funds could withstand both financial stress and operational disruption, they also identified areas where resilience will require further investment.

The regulator said the findings will directly shape future policy. APRA intends to consult on proposed amendments to bank liquidity requirements within the next 12 months and will incorporate the results into its supervisory work across both banking and superannuation. The exercise also reinforced the importance of its ongoing work on operational risk management, particularly oversight of arrangements involving material service providers.

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