Financial Stability Review – April 20253. Resilience of the Australian Financial System
Summary
The Australian financial system continues to display a high level of resilience and is well placed to continue to provide vital services even in the event of a severe downturn. However, the high degree of geopolitical and international policy uncertainty means financial institutions need to display ongoing vigilance, including with regard to operational risk.
- The resilience of Australian banks over recent years has been evident in prudent lending standards, the high quality and quantity of capital, and large liquid asset buffers. Banks’ asset quality has remained high. Despite a small share of borrowers facing severe financial stress due to persistent budget pressures and increase in interest rates in recent years, loan losses for banks have been low. Banks have the financial resources to absorb materially higher loan losses (in the event of a downturn) while continuing to lend to households and businesses.
- The financial stability risk posed by the non-bank financial institutions (NBFI) sector in Australia is contained by the composition of the sector. Unlike some other advanced economies, only a small share of NBFI assets are held by NBFIs that operate with risky features like high leverage, opaque business structures, large-scale liquidity mismatches and light-touch regulatory oversight. Around half of NBFI assets are held by APRA-regulated superannuation funds. Most of these are defined contribution funds that are restricted from directly taking on leverage. This makes them unlikely to pose a direct threat to financial stability, but they could potentially pose an indirect threat by amplifying shocks in the financial system.
- The superannuation sector has tended to support financial stability in the past, but it also has the potential to amplify stresses in the financial system in rare circumstances. The sector has generally displayed a high level of resilience in the past, in part due to restrictions on the use of leverage and the closed nature of the system to rapid liquidity withdrawals. It has also contributed to financial stability by supplying markets with liquidity in periods of financial stress, as in the global financial crisis (GFC). However, there are plausible but extreme conditions where the sector could potentially amplify liquidity stresses in markets. One scenario could be where the sector was unexpectedly and abruptly exposed to severe drains on liquidity – for example, an unexpected policy change allowing additional member withdrawals in a crisis and payments related to foreign exchange hedges during a significant decline in Australian dollar – at a time where selling securities to raise liquidity disrupted the functioning of markets. Insuring against risks of this nature, alongside cyber and other operational disruptions, remains an ongoing area of regulatory focus.
- The insurance sector displays resilience, but insurance affordability and availability may become increasingly challenging over time. The general insurance sector is well capitalised and recent profitability has been supported by low claims, higher premiums and a moderation in the growth of reinsurance costs. However, over the longer term, home insurance affordability in areas exposed to physical climate risk could continue to worsen. If this led to declining insurance coverage among mortgagors, banks may be increasingly exposed to financial losses, potentially leading to financial stability risks in the longer term.
- In December 2024, an operational incident caused serious disruption to the clearing and settlement of the cash equities market, but did not threaten financial stability. This highlighted serious operational risks related to CHESS that have been of concern to regulators for some time. Regulators have recently taken a series of regulatory actions to address these concerns and will consider further regulatory measures should these actions prove insufficient.
3.1 Banks
Asset quality has remained sound with loan losses very low.
The banking sector’s asset quality, as measured by loan arrears, declined in 2024 but remains sound. Banks expect loan arrears to peak this year, based on current forecasts for inflation to moderate, interest rates to decline and employment to remain robust. Over 2024, the share of non-performing loans – a broader measure of asset quality than loan arrears – rose to around 1.1 per cent in December 2024, near the (modest) pandemic-related peak (Graph 3.1).1 This increase was primarily driven by housing loans, reflecting the pressure of inflation and interest rates on household budgets. The share of non-performing business loans rose by less despite business insolvencies increasing sharply over the past two years. This reflects that most businesses entering insolvency are small and have little debt, while the businesses to which banks typically lend have been more resilient (see Chapter 2: Resilience of Australian Households and Businesses). Additionally, although the share of non-performing personal loans has increased since 2022, personal loans account for less than 5 per cent of total credit.
Bank loan losses remained very low over 2024. Housing price growth in recent years has helped some severely stressed mortgage borrowers repay their debts by selling their property. While this is a last resort (and a very disruptive) solution for owner-occupier borrowers, it has insulated banks from losses. Moreover, some factors are believed to have contributed to an upward trend in the share of housing loan arrears over the past two decades, without a corresponding increase in overall loan losses (see Box: Understanding the long-run increase in banks’ housing loan arrears). A severe unemployment shock, however, could increase loan losses by pushing more households and businesses into stress and by reducing the value of the collateral – such as property – that secures their borrowing.
The banking sector is well placed to manage losses and keep lending if there was a severe economic downturn.
The robust capital base of the banking system – reflected in quantity and quality terms – helps the system to absorb losses without disrupting its ability to service the economy. The banking sector’s ratio of Common Equity Tier 1 (CET1) capital – the highest quality regulatory capital – to risk-weighted assets was 12.1 per cent in December 2024 (Graph 3.2). This ratio was 9 per cent in December 2014. The Australian Prudential Regulation Authority (APRA) recently announced changes to bank capital regulations to simplify and improve the effectiveness of bank capital in a crisis. From 2027, the role of Additional Tier 1 (AT1) capital instruments will gradually be replaced with other forms of capital that are considered more reliable in a stress situation.2 The banking system’s resilience is also supported by its profitability and solid provisioning. APRA’s recent stress testing suggests that large banks could continue to provide credit to the economy even in a severe but plausible economic downturn.3
While banks’ liquid asset holdings are large, it is also important that they can be quickly converted to cash in times of liquidity stress with limited erosion of value.
Banks hold liquid assets to ensure they can make payments to other financial institutions. Banks can borrow Exchange Settlement (ES) balances – money held at the RBA used to settle interbank payments – against high-quality collateral from the RBA for short terms at an interest rate that is close to the cash rate target. The RBA can vary this interest rate to implement monetary policy. Under the RBA’s ‘ample reserves with full allotment’ system, eligible counterparties, including banks, can borrow as many ES balances as they demand at weekly open market operations (OMO). If eligible counterparties cannot find liquidity on suitable terms in private markets or via OMO, they are expected and encouraged to use the RBA’s overnight standing facility. The RBA and APRA consider the use of the overnight standing facility by banks to be consistent with routine liquidity management activities.4
The banking sector also holds significant reserves of liquid assets to manage large, unexpected cash outflows. Liquid asset holdings help banks manage large, unexpected cash outflows, which can be very rapid in the digital era, as demonstrated by the 2023 banking turmoil in the United States and Switzerland. The sector’s liquidity ratios are lower than their pandemic highs – when system liquidity increased to unusually high levels due to policy actions by the RBA, such as the introduction of the Term Funding Facility – but remain above pre-pandemic levels and well above regulatory requirements (Graph 3.3).
Banks hold a variety of liquid assets, some of which are more liquid than others. A large share of liquid assets is held in ES balances – the most liquid asset available – as well as in Australian Government securities and semi-government securities. Under APRA’s liquidity regulations, smaller and less complex banks (i.e. minimum liquidity holdings (MLH) banks) can also hold bank debt securities as liquid assets. In times of liquidity stress, banks may attempt to raise ES balances by selling other liquid assets or by borrowing against other liquid assets in wholesale markets. However, MLH banks with large liquidity portfolios concentrated in bank debt securities could struggle to raise sufficient ES balances without reducing the value and liquidity of those securities in the course of their sale. This could weaken the liquidity positions of other MLH banks holding bank debt securities as liquid assets. Reflecting this, APRA announced last year that it will heighten its supervisory engagement with MLH banks that have material holdings of debt securities of other banks in their liquid asset portfolios.
The Council of Financial Regulators (CFR) has continued work to support crisis readiness, and the soundness and effectiveness of the banking sector.
The financial crisis management preparedness of the Australian and New Zealand agencies was tested in a crisis simulation exercise in September 2024. The exercise simulated the failure of a hypothetical large trans-Tasman bank and provided several lessons. It demonstrated the importance of continuing to maintain and strengthen crisis preparedness arrangements in an evolving environment. Strong and effective coordination arrangements across the CFR agencies in Australia and their equivalents in New Zealand are an essential element of crisis preparedness.
The CFR will provide the government with a report on its review into small and medium-sized banks by July 2025. The review was requested by the Treasurer and conducted by the CFR agencies in consultation with the Australian Competition and Consumer Commission. It examines the role of small and medium-sized banks in providing competition, the regulatory and market trends affecting their competitiveness, and sources of, and barriers to, competition. As part of the review, the CFR agencies are consulting with the banking sector and public, including through an issues paper published in December 2024.5
CFR agencies continue work on enhancing cyber and operational resilience in the Australian financial system.6 Cyber and operational risks are increasing in scale and complexity over time as operating models in the financial system develop, including greater reliance on technology and third-party service providers. This is occurring at a time of heightened geopolitical tensions, which increases the prospect of cyber-attacks that could have systemic implications. The CFR’s Cyber and Operational Resilience Working Group continues to pursue a program of work, alongside CFR agencies, to strengthen cyber and operational resilience in the financial system, with a particular focus on better understanding concentration risks, testing crisis management and cyber defence plans, and building back-up payments capabilities.
Box: Understanding the long-run increase in banks’ housing loan arrears
The share of housing loans with payments more than 90 days overdue (‘in arrears’) is low but has trended upward since 2004 (Graph 3.4). The share has risen from very low levels in 2004 to around 0.8 per cent in 2024, which is still low by historic and international standards; for example, it peaked at close to 9 per cent in the United States during the GFC. This increase has occurred despite a broad improvement in bank lending standards over the period. Understanding the drivers of the trend in housing loan arrears can help our understanding of financial stability risks, as mortgages are banks’ largest asset and households’ largest debt liability.
Three main factors help explain the trend:
- More highly leveraged borrowers: Higher leverage reduces borrowers’ resilience to shocks that decrease income or increase expenses (such as loss of work or higher interest rates). Between 2002 and 2022, the share of owner-occupier borrowers with high debt-to-income ratios (DTIs at or above six) is estimated to have risen from 4.7 per cent to 7.5 per cent, although the flow of new housing loans at high DTIs has been low over the past year. Having a high DTI – and so higher repayments relative to income – makes it more likely that borrowers who experience financial shocks will fall into arrears.
- Longer loan repayment periods: Households are now taking longer to repay their loans, in part related to an increase in household DTIs over the past two decades, which raises the likelihood of encountering financial shocks over the life of a loan. The average actual loan term has risen from around 12 years in 2002 to around 19 years today, and housing turnover has declined. Older housing loans typically have higher arrears rate, as borrowers’ financial pressures tend to build over time.
- Extended duration of arrears: Housing loans that fall into arrears are staying overdue for longer. Banks have become more willing to work with households in financial stress by implementing measures to support borrowers who fall behind on their repayments. The recent increases in the share of housing loans in arrears is mainly driven by loans remaining delinquent for an extended period rather than an increase in new defaults.
Given that these factors are likely to be persistent, it is unlikely that the share of housing loan arrears will return to the very low levels seen in the early 2000s. However, the current share of housing loan arrears remains low and, to date, the increase in arrears has not caused a material increase in loan losses, in part due to banks maintaining prudent lending standards, such as limiting loan-to-value ratios. In addition, the gradual nature of the above structural changes has provided banks with time to adjust their risk management strategies – such as raising provisions and capital levels – to mitigate the impact of this upward trend.
3.2 Non-bank financial institutions (NBFIs)
The risk to financial stability posed by the Australian NBFI sector is contained.
The NBFI sector poses a limited risk to financial stability in Australia, primarily due to the sector’s composition. NBFIs are a diverse range of financial institutions that operate without banking licences, such as superannuation funds, insurers, non-bank lenders and investment funds. Although NBFIs collectively account for roughly half of financial system assets in Australia, approximately half of these assets are in the superannuation sector. Structural features of the Australian superannuation sector help mitigate its direct threat to financial stability; however, in extreme but plausible conditions it could potentially pose an indirect threat by amplifying shocks in the financial system, as discussed below. A relatively small share of NBFI assets in Australia are held by other NBFIs that operate with more risky features, such as higher leverage or opaque business structures with little regulatory oversight.7
The superannuation sector benefits the Australian economy and financial stability.
Growth of the superannuation sector has increased its importance to the Australian financial system and economy. The value of assets managed by the superannuation sector has doubled in the past decade to $4.2 trillion in December 2024 – around 150 per cent of GDP. Around two-thirds of those assets are managed by APRA-regulated funds, the largest and most systemically important type of funds. The other one-third of assets are managed by a diverse set of (typically small) self-managed superannuation funds (SMSFs), some public sector funds and life office funds. The sector’s growth has supported the economy by helping Australians save for retirement and channelling those savings into return-generating investments, including providing long-term capital to Australian businesses. APRA-regulated funds hold a significant share of domestic financial assets (Graph 3.6).
The superannuation sector has typically supported financial stability in the past. APRA-regulated funds are mostly defined contribution funds, where investment gains and losses are passed directly through to end investors, and are restricted from directly taking on leverage. As long-term investors, superannuation funds are less likely than others to exacerbate market moves by selling investments in a sharp downturn. By investing countercyclically – buying assets as their prices fall – funds can support financial stability during periods of market stress. Steady inflows of liquidity into superannuation funds (from member salaries) can lend support to this approach.
However, financial system stress could be amplified if the superannuation sector faced severe liquidity stress. APRA-regulated funds rely on member inflows and large buffers of liquid assets to manage potential cash outflows. If several risks materialised simultaneously, these funds might be forced to secure liquidity in ways that could amplify financial market stress. Currently, around 48 per cent of APRA-regulated funds’ assets are invested in foreign assets, much of which are protected against losses related to currency movements with foreign exchange hedges. A large, sustained decline in the Australian dollar could drain liquidity through margin calls and renewal of foreign exchange hedges. Similarly, increased member transfers between funds could cause the sector to sell assets to increase cash holdings as a buffer against future transfers.8 Funds manage these liquidity risks in various ways. For example, some funds slow the pace of the liquidity impact associated with FX hedges by not paying margin on their hedging contracts and spreading their maturities over time. If system-wide early withdrawals and additional withdrawals from members in retirement were to occur abruptly and unexpectedly, for instance in a crisis, this could also create liquidity pressures for some funds.
Continued strengthening of liquidity and operational risk management is important for the superannuation sector to support financial stability.
In the years ahead, managing liquidity risk could become more challenging as the sector matures and is expected to grow faster than the domestic economy. The net inflow of funds from members is expected to decline as the profile of members shifts towards retirement.9 And, as the sector expands relative to domestic markets, funds may further increase their investments in foreign assets – thus relying more heavily on foreign exchange hedges – and in unlisted assets, which are difficult to liquidate quickly. The largest superannuation funds report that the majority of their inflows are now being invested in foreign assets. In December 2024, APRA published the findings from a thematic review of valuation and liquidity risk governance. Several of the trustees participating in the review were found to require material improvement in either or both of their valuation governance and liquidity risk frameworks.10
Understanding how the superannuation sector responds to liquidity stress will help the sector and authorities to support financial stability. Given its size, the APRA-regulated superannuation sector has large exposures to the rest of the Australian financial system, including broad and significant claims on banks (Graph 3.7). During a period of stress, superannuation funds could support or weaken the banking sector by increasing or reducing their funding of banks (e.g. by selling bank debt securities). Insights into this and other stress dynamics will be provided by APRA’s first financial system risk stress test, which will be conducted this year to examine how risks can transmit between different sectors of the financial system.11 Lessons from the stress test will help authorities sharpen their response to systemic risks and inform APRA’s future stress testing program.
Ensuring operational resilience in APRA-regulated funds, including their outsourced operations, is critical. Disruptions at key third-party service providers can affect many funds and have a systemic impact. To address these challenges, APRA has strengthened its operational risk expectations on its regulated funds. The new prudential standard on operational risk management, CPS 230, is due to come into effect in July 2025.12
The systemic importance of the non-bank lender sector in Australia is limited by its small size.
Non-bank lenders are an important source of finance for Australian households and businesses, but the sector’s systemic importance is limited by its small size. Non-bank lenders – that is, lenders that are restricted from offering deposits – account for 6 per cent of financial system assets. Registered financial corporations (RFCs) – which make up around half of non-bank lenders by size – grew their market share of housing and business lending over 2024 (Graph 3.8). The growth in non-banks’ housing lending was supported by strong investor demand for securitisations, making it cheaper for RFCs to fund housing lending. Annual growth in non-banks’ business lending, which was very strong in 2023, declined to a still strong 13 per cent in the year to January 2025. This reflected a broad-based decline in non-bank business lending growth over the last few months of 2024. Nevertheless, over 2024, non-bank lenders continued to increase their market shares in lending to business sectors less serviced by banks, such as SMSFs, vehicle financing and inventory lending. Notwithstanding their relatively small size, non-bank lenders could contribute indirectly to systemic risk if banks responded to a loss of market share to non-banks by reducing their lending standards.
Non-bank lenders’ asset quality appears sound, but it will be important to monitor developments that could weaken future lending standards. The share of RFCs’ housing lending 90+ days in arrears is low, at nearly 1 per cent in December 2024 – slightly above the share at banks. Liaison suggests some RFCs have reduced their equity stakes in the securitisations they issue and have sold their housing loan books to private equity firms. While these developments are not immediately concerning, over time they could weaken RFCs’ incentive to maintain lending standards by reducing their ‘skin in the game’. While visibility of asset quality in non-bank lenders’ business lending is limited, RBA liaison suggests it has declined slightly but remains broadly sound. Competition between banks and non-bank lenders for development lending appears to have increased, which would be concerning if it led to lower lending standards (see Chapter 2: Resilience of Australian Households and Businesses).
The general insurance sector is not a material source of financial stability concern, but rising premiums have reduced insurance affordability.
The general insurance sector is well capitalised and profitable overall. The sector’s capital ratios are well above APRA’s prescribed capital amount. Recent profitability in the sector has been supported by low claims, higher premiums and a moderation in the growth of reinsurance costs, after increasing significantly over recent years. However, claims could continue to rise, including due to the impact of Cyclone Alfred in Queensland and New South Wales in March. And insured losses from the Los Angeles wildfires in January could put upward pressure on future reinsurance costs. Recognising the importance of reinsurance to general insurers in Australia, APRA sought feedback in November on ways to promote access to reinsurance, including alternative reinsurance arrangements.13
Rising premiums in recent years have decreased insurance affordability, including for property insurance.14 Recent surveys indicates that 4 per cent of households have identified living in uninsured properties and 7 per cent in underinsured properties.15 Slightly over half of these households self-report residing in a moderate-to-high risk area for natural disasters (Graph 3.9). Property insurance is essential for managing households’ risk and is a precondition for obtaining a mortgage from a bank. However, banks have limited visibility on homeowners’ retention of property insurance after they originate a housing loan. Consequently, the trend of declining affordability – especially as climate change intensifies climate and weather-related risks – poses serious challenges, particularly in areas at higher risk of natural perils. If this were to lead to declining insurance coverage among mortgagors, banks may be increasingly exposed to financial losses from physical climate risk, potentially leading to financial stability risks in the longer term.
3.3 Financial market infrastructures (FMIs)
New powers have been provided to FMI regulators.
New legislation came into force on 24 September 2024 that better aligns the powers of FMI regulators (the RBA and the Australian Securities and Investments Commission) with their responsibilities and streamlines existing powers.16 The new legislation also expands the scope of the regulatory framework for clearing and settlement facilities (CS facilities), reflecting their central role in the financial system. The updated framework provides the RBA enhanced powers for supervision and expanded responsibility for crisis management including crisis prevention and resolution.
The enhanced supervisory powers will allow the RBA to more effectively monitor and enforce compliance with its Financial Stability Standards. The clearing and settlement crisis management powers, which align with international standards, include the designation of the RBA as resolution authority. The new legislation equips the RBA with strong powers to respond to severe distress at domestic CS facilities. The RBA’s objective in using these powers is to protect continuity of services that are critical to the functioning of the Australian financial system and to safeguard financial stability.
The RBA is progressing the operationalisation of the clearing and settlement resolution framework, working in close collaboration with the other CFR agencies. The RBA has initiated resolution planning for the ASX CS facilities and expects to consult on additional guidance on the use of its new resolution powers later this year.
FMI regulators have taken actions against ASX to address operational risks related to CHESS.
There was a major operational incident that caused serious disruption to the clearing and settlement of the cash equities market in December 2024. ASX Settlement experienced a failure in its batch settlement process in CHESS, the clearing and settlement infrastructure for the Australian cash equities market. This resulted in all trades in the market being unable to settle on the day.
The incident was disruptive but had a limited impact on financial stability. This was due to a number of factors. The incident occurred on a Friday, which allowed two days before the market was due to open again. Trading volumes were also lower due to the time of year. Were an incident of this nature to occur in different circumstances, the impact on the financial system could be significant. Furthermore, any additional incidents may have a cumulative effect on market confidence.
The incident highlighted serious operational risks related to CHESS that have been of concern for some time. In light of these concerns, the FMI regulators, have recently taken a series of regulatory actions against ASX.17 The FMI regulators also intend to consider further regulatory measures should these actions prove insufficient in causing the necessary cultural change and reduction of risks at ASX.
Endnotes
A loan is considered non-performing if it has been in arrears for at least 90 days or the lender considers that the borrower is unlikely to pay in full. 1
APRA (2024), ‘APRA to Phase Out AT1 as Eligible Bank Capital’, Media Release, 9 December. 2
Lonsdale J (2024), ‘Opening Statement to Senate Economics Legislation Committee’, Statement, November. 3
Kent C (2025), ‘The RBA’s Monetary Policy Implementation System – Some Important Updates’, Speech at the KangaNews Debt Capital Markets Summit, Sydney, 2 April; RBA and APRA (2025), ‘Joint APRA-RBA Statement on Use of the RBA’s Overnight Standing Facility’, Media Release No 2025-11, 2 April. 4
CFR (2024), ‘Review into Small and Medium-sized Banks: An Issues Paper by the Council of Financial Regulators, in consultation with the Australian Competition and Consumer Commission’, December. 5
For more detail, see RBA (2024), ‘Box: Initiatives to Enhance Operational Resilience in Australia’, Financial Stability Review, September. 6
In Australia, these NBFIs include non-bank lenders (primarily securitisers, finance companies and managed funds investing in debt) as well as a smaller share of entities consolidated into banking groups and other investment funds that do not intermediate credit (such as equity funds). 7
Super funds can apply to APRA for temporary relief from portability requirements to avoid significant adverse effects on the trustee or members. 8
Treasury Research Institute (2019), ‘The Superannuation System in Aggregate’, November. 9
APRA (2024), ‘APRA Review Highlights the Need for Improved Valuation and Liquidity Risk Governance in Superannuation’, Media Release, 17 December. 10
Lonsdale J (2024), ‘Forewarned and Forearmed’, Speech to the European Australian Business Council, 25 November. 11
APRA (2023), ‘APRA Finalises New Prudential Standard on Operational Risk’, Media Release, 17 July. 12
APRA (2024), ‘Consultation on Targeted Adjustments to General Insurance Reinsurance Settings’, Media Release, 7 November. 13
For example, the Actuaries Institute estimates that, as at March 2024, 15 per cent of households experienced home insurance affordability stress – defined as households facing annual home insurance premiums that exceed four weeks of income – up from 12 per cent in March 2023. See Actuaries Institute (2024), ‘Home Insurance Affordability and Home Loans at Risk’, Report, August. 14
The information comes from the annual Household, Income and Labour Dynamics in Australia Survey, which included questions on home and contents insurance affordability in the survey released this year. 15
Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024. 16
RBA (2025), ‘RBA and ASIC Act on Deep Concerns with ASX’, Media Release No 2025-09, 31 March. 17