Officials of the International Monetary Fund (IMF) are in Sydney to conduct stress test on ANZ, Commonwealth Bank, National Australia Bank and Westpac.

The stress test on the big four is part of more intense scrutiny from the IMF and credit rating agencies as the debt problems of Europe cause offshore funding costs to go up and Australia's economy slows down.

The IMF officials have been in the country this week and will end their field visit on Wednesday. The fund is conducting more surveillance on the global banking system since the 2008 global financial crisis and plans to assess the top 25 banking sectors in the world every five years.

The IMF had announced in January that it has scheduled assessments for G-20 nations including Australia, Brazil and Japan.

Although the big four continue to register strong earnings, its margins are affected by rising funding cost which prompted the lenders to keep part of the 50-basis points cut made by the Reserve Bank of Australia.

In 2010, the Australian Prudential Regulation Authority (APRA) conducted a review of Australian banks in which all the lenders passed. During the review, the regulator asked the banks to build stress models based on a 3 per cent contraction in real gross domestic product, unemployment rate of 11 per cent, a 25 per cent decline in house prices from peak-to-trough and 43 per cent dip in commercial property prices.

Recently, APRA warned Australian banks against seeking greater risk-taking amid the low-growth environment. Moody's Investors Service forecast Australian banks would have more problems if it would experience difficulty accessing offshore funding as a result of the Greek crisis.

"Australian banks will have to perform quite well and maintain strong balance sheets to maintain their ratings.... Where there are signs of economic uncertainty and banks around the world are being downgraded, it puts a little bit of downward pressure on Australian banks," The Australian quoted Moody's senior analyst Peter Tebbutt.

Moody's started downgrading the credit ratings of European and global banks, beginning with 26 Italian lenders this week. By the end of June, Moody's would have likely downgraded more than 100 European banks and major Wall Street lenders such as the Bank of America and Citigroup.

The European debt crisis continues to worsen over worries that Greece may be forced to leave the eurozone. Although Australian banks have minimal direct exposure to the eurozone, analysts said the larger impact on the Australian economy would be slower trade if Europe goes into deeper recession.

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