Financial Stability Review April 2023

At a Glance

Global financial stability risks have increased

Some banks overseas have failed because of weaknesses in their business models and poor risk-management practices. While the broader global banking system has remained resilient, risk aversion among investors has increased.

The failure of three regional banks in the United States represents the most serious stress event for the US banking system since the global financial crisis. It has led to increased risk aversion among investors, resulting in volatility in some financial markets and liquidity stress in parts of the global banking system. These pressures culminated in the regulator-facilitated takeover of Credit Suisse by UBS, which has had its own long-running issues with governance and profitability.

Despite these events, the broader global banking system has remained resilient, supported by the prompt actions of authorities and earlier reforms that require large banks to maintain high levels of capital and liquidity. Nonetheless, there remains a risk of further stress affecting banks, which would feed through to tighter financial conditions. This could result in higher borrowing costs and reduced supply of credit to households and businesses.

High household and business indebtedness is a key medium-term vulnerability in some advanced economies, particularly amid slowing economic growth and rising interest rates. While households and businesses have so far been resilient to higher interest rates and the squeeze on cash flows, risks are building and could be realised quickly if lending standards tighten significantly.

The Australian financial system remains strong and well placed to support economic activity

Australian banks are well regulated, well capitalised, profitable and highly liquid; they are in a strong position to continue lending to domestic households and businesses.

Australian banks entered this more challenging environment for global financial stability in a strong position – the result of banks’ significant capital and liquidity buffers, well-established risk controls, and a strong domestic regulatory and supervisory framework administered by the Australian Prudential Regulation Authority.

Other large financial institutions also remain resilient. Superannuation funds have effectively navigated periods of volatility in asset markets, though recent events have highlighted the importance of maintaining robust liquidity management practices. Likewise, insurers’ capital levels remain well above regulatory requirements, though the cost of claims has increased due to inflation and higher-than-expected natural disaster claims.

Cyber resilience continues to be a focus for financial institutions and regulators. Recent high-profile cyber-attacks demonstrate the potential for such attacks to not only harm the individuals affected, but to spill over to other organisations and the financial system more broadly.

Higher interest rates and inflation are putting pressure on household budgets and financial stress is increasing among some households, but most remain resilient

A small cohort of borrowers with low savings, high levels of debt and low incomes are most at risk of facing difficulties in servicing their debts.

Australian households and businesses are generally well placed to manage the impact of higher interest rates and inflation, supported by continued strength in the labour market and sizeable savings buffers. However, this resilience is unevenly spread. Some households and businesses are already experiencing financial stress, and the squeeze on household budgets is likely to continue to build.

As a result, banks expect the share of households and businesses falling behind on their loan payments to increase over the period ahead. That said, the share of non-performing loans are near historically low levels, and banks are well placed to manage an increase in non-performing loans while continuing to lend to households and businesses.