A new working paper published by the International Monetary Fund indicates that Australia’s conservative approach to the implementation of Basel II has resulted in high quality capital at good levels, suggesting that they are well-positioned to meet the Basel III standards on both capital and liquidity. The paper states that Australia’s banks could withstand sizable shocks to residential mortgages, however in an extreme adverse scenario of a residential mortgage shock combined with corporate losses similar to those experience during the financial crisis, it is likely that capital levels would reduce to below the regulatory minimum. As a result, the paper argues that higher capital requirements for domestic systemically important banks would be merited.