#Australia Prudential Regulatory Authority

On Friday, the Washington Post reported that Key Bridge passed all its stress tests before it fell into the harbor.  These were well-established protocols looking at structural resilience – acceptable, if not awesome – and, after 9/11, also at terrorist attack.  That a giant container ship might plow into the bridge was not contemplated even though this has happened before in the U.S. and not that long ago.  Which brings me to bank stress-testing and how unlikely it is to matter under actual, acute stress because the current U.S. methodology correlates risk across big banks in ways that can make bad a lot worse.  Even more troubling, tests still don’t look over the banking parapet.

To be sure, the Fed’s semi-annual financial-stability reports (see Client Report SYSTEMIC97) muse about risks that lurk outside the largest banks, and FSOC dutifully catalogs nonbank risk each and every year in a copious annual report (see Client Report FSOC29).  Last year, FSOC also said a lot about what might someday be done to address it via systemic designation (see FSM Report SIFI36).  But what’s being done, not just said, about nonbank risk even as inter-connections become ever more entwined?  Not much in the U.S. even though other national regulators are taking meaningful steps first to know where it lies and then to curtail it.

For example, the Bank of England and Australia’s Prudential Regulatory Authority are quickly moving past bank-centric stress testing, with Australia importantly looking not just within the financial …