Financial Stability Review – October 2023

The Financial Stability Review provides the RBA's assessment of the current resilience of the financial system and potential risks to financial stability. It is issued half-yearly.

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In Brief

Global financial stability risks are elevated due to challenging macroeconomic conditions, but the Australian financial system remains strong.

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Households

Australian households have been largely resilient in the face of high inflation and higher interest rates, although some are vulnerable to further shocks.

Low unemployment and sizeable savings buffers have helped households service their debt alongside increases in the cost of living.
Many households have adjusted their finances, including by curtailing spending, increasing hours worked, reducing their rate of saving or drawing down existing savings.
Incidences of severe financial stress are expected to increase but remain limited to a small share of mortgage borrowers.

Businesses

Australian businesses have been supported by the strong recovery from the pandemic but cost pressures and slowing demand are weighing on some.

Businesses are experiencing pressure from higher input costs, higher interest rates and softening demand, making them vulnerable to further shocks.
Company insolvencies have increased to pre-pandemic levels, although most have been small firms with little debt and so the broader impact has been limited.
Despite challenging economic conditions, risks to the broader financial system stemming from the business sector remain low.

Banks

Australian banks remain well positioned to continue supplying credit to the economy if economic conditions worsen.

Banks are profitable and hold capital well in excess of regulatory requirements, and banks’ funding sources are diversified and have become more stable over the years.
Few borrowers are in negative equity on their housing loans, reducing the losses banks would face if more mortgage borrowers were unable to service their loans.
Risks in global and Australian commercial real estate markets (CRE) markets are elevated, but CRE risks to the Australian financial system remain low.

Non-banks

Unlike in some other economies, systemic risks from financial institutions outside the banking sector remain low in Australia.

Non-bank financial institutions (NBFIs) account for half of global financial system assets, and risks from NBFIs remain elevated.
However, in Australia, systemic risks posed by NBFIs remain low.
High insurance claims due to recent weather events are leading to higher insurance costs and lower coverage, particularly for regions most exposed to natural disasters.

Risks in a digital world

The threat of cyber-attacks and other technology-related risks highlight the need to strengthen the operational resilience of the Australian financial system.

Cyber risk is a key operational vulnerability for the financial system, especially as cyber-attacks have increased in number and severity over recent years.
To manage rising threats, Australia’s regulatory agencies have increased their supervision of operational resilience among key financial institutions.
Financial institutions must continue to invest time and funds in their operational defence and recovery plans.

Beyond the border

Stress in China’s financial system could spill over to the global financial system, including Australia, via slower growth and an increase in risk aversion.

The continued deterioration in the property sector has increased risks to China’s financial system.
The impact of financial stress in China on Australia is most likely to be felt through slowing global economic activity, lower global commodity prices, reduced Chinese imports of Australian goods and services, and an increase in global risk aversion.
Direct links between the Australian and Chinese financial systems are small.