The Reserve Bank of Australia (RBA), in its latest semi-annual Financial Stability Review (FSR), has reaffirmed the resilience of the Australian financial system while highlighting some emerging risks. The report indicates that while overall risks are contained, stress in China’s financial sector remains a concern, especially given the lack of substantial measures from Beijing to address these issues.
Several important risks were identified in the report. There is an ongoing danger posed by low global risk premia alongside high leverage, which could potentially trigger a sharp decline in global asset prices. Additionally, the financial system’s increasing dependence on digital technology and the concentration of artificial intelligence and cloud service providers present vulnerabilities. Notably, the growth of superannuation, which now constitutes a quarter of the financial system, could amplify the effects of economic shocks.
Despite these risks, widespread financial stress within Australia appears limited. Only a small percentage of home borrowers are struggling to keep up with payments, with about 2% of owner-occupier borrowers facing potential default. Additionally, fewer than 1% of these loans are more than 90 days overdue, and it is estimated that only around 0.5% of home loans in arrears are in negative equity. The majority of borrowers are expected to continue meeting their debt obligations.
However, there are concerns that household debt levels could rise significantly if interest rates decline. On a positive note, Australian banks are reported to be well-capitalized, maintaining profitability while exhibiting low exposure to problematic debt. Regulators have stated that enhancing the operational resilience of banks remains a top priority.
The market reacted positively to the FSR, with the Australian dollar strengthening against the U.S. dollar, indicating investor confidence bolstered by the favorable assessment of the financial system’s stability.
