The complexity of some instruments creates difficulties with respect to valuation, risk measurement, and risk management. Also, the trading of certain instruments has at times run well ahead of developments in the infrastructure necessary for clearing and settling those trades. Although impressive progress is being made toward addressing these challenges, I believe they need continuing attention from market participants and policymakers.
The second potential concern is the balance sheets of lenders. This scenario is among those routinely envisaged by APRA’s stress tests over recent years. The results of such exercises always show that even with substantial falls in dwelling prices, much higher unemployment and associated higher levels of defaults, key financial institutions remain well and truly solvent.