NO.115

IMF FINDS AUSTRALIAN FINANCIAL SECTOR MATURE AND STRONG

The IMF’s Australian Financial System Stability Assessment (FSSA) has found Australia’s financial sector is mature and strong, having enjoyed sustained favourable macroeconomic conditions, with the current economic expansion in its fifteenth year. The banking system is sound with high earnings, strong asset growth and low levels of problem assets. There is generally a high level of compliance with international standards and, in a number of areas, Australia is at the forefront of best practice.

The FSSA represents the outcomes of the IMF’s 2005/06 Australian Financial Sector Assessment Program (FSAP). The Program consisted of two missions – the first was to conduct assessments of the Australian financial regulatory regime against the supervisory principles and codes applying to banking, securities, insurance and payment systems. The other aspect of the FSAP was stress testing of the four major banks, plus several smaller banks. Stress testing aims to assess key risks and vulnerabilities arising from macro-financial linkages.

FSAPs are designed to assess the stability of a country’s financial system in order to help countries identify and remedy weaknesses in their financial sector structure, thereby enhancing resilience to macro-economic shocks and cross-border contagion.

While acknowledging the strength of Australia’s financial system, the FSSA notes that the financial sector faces a number of vulnerabilities including macro-economic shocks; exposure to a highly leveraged household sector; dependence on wholesale funding; increased competition; and lack of diversification.

The versatility and strength of the Australian economy can be expected to generate fluctuations and pressures in different sectors. Australian regulators undertake appropriate supervisory and other regulatory activity to monitor and address these issues.

The Report recommends a framework for the resolution of failed financial institutions and crisis management.

This is the first time Australia has undergone an FSAP and the Government welcomes the opportunity to consider Australia’s financial system in the context of global standards. The process has been rigorous, involving comprehensive and detailed self assessments, and close examination by IMF officials. The Government welcomes robust external scrutiny of Australia’s financial system.

The IMF Public Information Notice is attached, with the FSSA available at the IMF’s website, http://www.imf.org, and on the Treasury website, http://www.treasury.gov.au.

24 October 2006

CANBERRA

Contact: David Alexander

02 6277 7340