By Paulina Duran
SYDNEY (Reuters) - Australia's prudential regulator said on Friday it was developing a new stress testing framework for the country's banks after a review showed they needed to improve their internal systems.
The Australian Prudential Regulation Authority (APRA) said the new internal testing framework would be developed at the same time as the regulator moves to its own annual stress-tests from the previous three-yearly checks.
APRA said its review of 28 banks, which was conducted by self-assessments from the banks, had found "areas for ongoing improvement in stress testing."
Banks are expected to regularly stress test their businesses to inform their capital and risk management decisions but about half of the banks reviewed, including the Australian unit of Bank of China <601988.SS>, did not have well-defined risk appetites, the regulator said.
Dividing the respondents into two groups, it said those in the second group had test scenarios and parameters that were often designed with less sophisticated considerations than their peers in the first group.
APRA said it would consult the industry on the development of the framework in the second half of the year.
The regulator also said it would be sending detailed letters to the country's banks, insurers and pension funds on its plans to test their businesses resilience to climate change.
APRA announced last month it was working alongside the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia to develop a climate change stress test that would enable it to understand the financial system's resilience to climate-related risks.
APRA is tightening its oversight of the financial services sector after a series of scandals in recent years, including bank breaches of money laundering rules and pension funds charging customers fees without providing services.
A Royal Commission inquiry last year criticized regulators, including APRA and ASIC for not having adequate oversight of the sector.
(Reporting by Paulina Duran in Sydney; Editing by Chris Reese and Jane Wardell)
