Australia continues to have a strong financial system, but the Australian Prudential Regulatory Authority needs to focus more on reviewing liquidity risk management.So says the IMF's latest Australian Financial System Stability Assessment, a document designed to help countries identify and remedy weaknesses in their financial sector's structure.The report says APRA needs to improve its formal on-site supervisory review of banks' liquidity risk management, spending more time on each bank than the current three to four days. It also recommends several improvements in APRA and ASIC's policing of insurance.It says the top-level Council of Financial Regulators, made up of the RBA, APRA, ASIC and Treasury, should make its work more transparent.The IMF also wants the Financial Claims Scheme funded by a levy before collapses occur, rather than afterwards, so that banks bear more of the cost of their own failures.And it warns that as banks see their funding costs rising and credit growth slowing, they may try to take greater risks to keep profits high.The report also argues that any spillover effect to New Zealand from an Australian bank collapse "is likely to be limited".