This paper outlines how the Reserve Bank of Australia’s bank stress testing model works. It also shows how the model was useful in a real-world crisis, at the onset of the COVID-19 pandemic.

It is often observed that the level of household debt (relative to income) is high in Australia compared with other countries and its own history. Concerns about how this will influence the economy’s ability to navigate a major downturn have for many years been central to understanding the resilience of the Australian economy. This paper...