Financial Stability Review – September 2024

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 vulnerabilities remain but the Australian financial system is proving resilient.

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Global environment

Inflation has eased, but the global economic outlook is still uncertain, and financial system vulnerabilities remain.

Digitalisation can improve efficiency in the financial system but can also increase its complexity and interconnectedness, leading to operational vulnerabilities.
Financial asset prices could fall sharply if there was a negative surprise such as the release of disappointing economic data or worsening geopolitical tensions.
Longstanding vulnerabilities in China’s financial system have worsened, in part due to the ongoing issues in the real estate sector.

Risks in a digital world

New technologies are enhancing operations in the economy and financial system, though they bring certain risks.

Artificial Intelligence (AI) and cloud computing bring cost and efficiency benefits, but disruptions at these service providers could negatively impact the financial system.
Recent technological outages highlight the need to strengthen operational resilience within firms and across the financial system.
Increased global tensions have raised the threat of cyber-attacks, highlighting the need for strong governance and operational risk management practices by Australian financial institutions.

Households

Budget pressures continue to be felt across the Australian community, but the share of borrowers experiencing severe financial stress remains small.

Most borrowers have kept up with their repayments and have either maintained or increased their saving buffers.
A small but rising share of households are falling behind on their mortgage repayments.
Financial pressures are expected to ease as inflation moderates further and Stage 3 tax cuts take effect, but conditions will remain challenging for some households and businesses.

Businesses

Most businesses are handling cash flow and balance sheet pressures, but conditions remain challenging for some, especially small businesses.

Many businesses had strong financial positions before the increase in inflation and interest rates, which has helped them through the more challenging recent period.
Business insolvencies have risen sharply in recent years as pandemic support has ended but insolvency rates are only slightly above pre-pandemic levels as a share of all businesses.
Most businesses entering insolvency are small with minimal debt, limiting the broader impact on the financial system.

Banks

Australian banks are well positioned to keep supporting the economy, even if loan arrears rise.

Banks have prepared for the recent rise in loan arrears and have the capacity to absorb any losses associated with these and further loan arrears.
Sound lending standards and large capital buffers mean banks could weather a deterioration in economic conditions while continuing to provide credit to the economy.
Furthermore, large liquidity buffers mean a temporary disruption to funding markets is unlikely to stop banks’ lending activity.

Non-banks

Risks to the Australian financial system from financial institutions outside the banking sector remain contained.

Superannuation funds pose limited risks due to their operation and structure, but their growing size will require them to continue strengthening liquidity risk management practices.
Higher premiums have strengthened the insurance sector but contributed to affordability issues for home insurance, with climate change expected to exacerbate these issues further.
Key financial market infrastructures and their participants have remained resilient despite occasional market volatility.