U.S. Bank funded European Bank and vice versa. And the two banking systems is helping fund the Aussie Bank assets. That is why the APRA, Australia’s banking regulator, has asked the bank to perform stress test their own sharp rise in unemployment-modeling and collapse in the property market Weakness.
The problem with self-stress testing results are always too hopeful. It is quite easy to assume certain fall in property prices or some percentage points increase in the unemployment rate. But the bank stress test in isolation. What about counterparty risk?
Before the collapse of the US property market, U.S. bank all think they will pull through OK. They do not take into account the collapse of the counterparty.