Financial Stability Review – March 20241. The Global and Macro-financial Environment


Risks to the outlook for the global economy have become more balanced as inflation has eased, but global financial stability risks remain elevated. The finances of many households and businesses have remained under pressure from high inflation and tight monetary policy. However, the overall picture is one of resilience to date, in part due to strong labour market conditions, a stabilisation or pick-up in real household income and solid corporate earnings. Globally, large banks have established sizeable capital buffers and remain well placed to weather a decline in asset quality or worsening macroeconomic conditions. That said, the regional banking sector in the United States continues to experience profitability pressures, and other global financial stability risks remain.

Among the global risks, three stand out as having the potential to affect financial stability in Australia:

  • Further weakness in the Chinese property sector could interact with longstanding vulnerabilities in parts of the financial system. If stresses were to spread throughout the financial system and economy more broadly, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion.
  • Deteriorating conditions in global commercial real estate (CRE) markets due to high interest rates and ongoing weak demand puts pressure on borrowers. While the direct risks are largest in overseas banking systems that are highly exposed to CRE lending, conditions in Australian CRE markets could be affected by the withdrawal of foreign investment, which increased significantly over the past decade or so (see Chapter 2: Resilience of Australian Households and Businesses).
  • There could be a disorderly adjustment in financial asset prices. Pricing in financial markets suggests participants expect an easing in monetary policy is likely later this year, with inflation returning to central banks’ targets and unemployment rates rising only modestly. Risk premia are low and declining. This leaves markets vulnerable to an adverse shock, including from inflation proving more persistent than expected or a severe geopolitical event. Disruptions to global asset prices could be amplified by shortcomings in the management of leverage and liquidity mismatches, including by non-bank financial intermediaries (NBFIs) in key financial centres.

Finally, threats generated outside or on the perimeter of the international and domestic financial system continue to build. These include cyber-attacks and operational risk more generally (including from artificial intelligence and migration to ‘the cloud’), risks associated with climate change and geopolitical tensions.[1]

1.1 Key developments

Global financial market participants have been increasingly optimistic about a soft landing.

Global financial market participants increasingly expect inflation to return to central banks’ targets with limited impact on growth and unemployment outcomes. Market participants expect central banks – with the exception of Bank of Japan – to begin cutting policy rates later this year, with market pricing implying most policy rates will have declined significantly by mid-2025. Government bond yields declined sharply in advanced economies at the end of 2023, reflecting falls in both real yields and inflation expectations, before reversing some of this decline in the March quarter of 2024. While corporate default rates have risen further, corporate credit spreads have declined to levels that are below long-term averages (Graph 1.1) and lending activity in private credit markets has accelerated further.[2] Issuance of corporate bonds and structured credit products has been robust of late. Risk premia in equity markets also remain around multi-decade lows and volatility remains subdued. Equity prices have reached record highs, and analysts expect corporate earnings to increase solidly over the next 12 months, particularly in the IT sector.

Graph 1.1
Graph 1.1: A two-panel line chart. The left panel shows that investment grade corporate bond spreads for Australia, US and Europe are highly correlated, and have declined to be at or below their long-term averages over 2023 and the beginning of 2024 after having increased in 2022. The right panel shows spreads for high yield bonds for the US and Europe, suggesting a similar trend over recent years, with spreads for these markets now well below average.

Households and businesses have been resilient in aggregate.

Household borrowers have remained financially resilient despite high inflation and tight monetary policy. Strong labour market conditions across advanced economies continue to play a key role in households’ financial resilience, combined with the large liquid savings buffers built up during the pandemic. However, saving rates are now back to around pre-pandemic levels in a number of economies and, in some countries, households have drawn on their buffers in response to the rising cost of living and higher interest rates (Graph 1.2).

Graph 1.2
Graph 1.2: A two-panel line chart. Left-hand panel contains gross savings ratios for select advanced economies; savings rates have declined since the COVID-19 pandemic. Right-hand panel shows the stock of excess savings in select advanced economies. The stock of excess savings has been declining in Australia and the United States.

The financial experience of households remains uneven, with some indicators of early-stage financial stress increasing further. Growth in credit card usage in Canada and the United States suggests some households are increasingly relying on this form of credit to support consumption and manage cost-of-living pressures. Consumer loan arrears have continued to rise in these countries, albeit from a low base.

Most households are expected to remain resilient to challenging macro-financial conditions, but a significant deterioration in the labour market would present significant downside risk. Household debt-servicing obligations as a proportion of disposable income are low relative to historical levels across a number of advanced economies, partly because of the boost to incomes from strong labour market conditions. Mortgage arrears rates have risen but remain at a relatively low level in most advanced economies (Graph 1.3). Regulators generally expect that most borrowers will be able to continue to service their mortgages in most plausible scenarios. Authorities in New Zealand and the United Kingdom have highlighted banks’ willingness to offer forbearance and support to borrowers who are experiencing temporary difficulties, although the number of borrowers entering formal hardship programs has been limited.

Graph 1.3
Graph 1.3: A one-panel line chart showing mortgage arrears rates in select advanced economies. Mortgage arrears rates have ticked up slightly recently, but remain at low levels relative to history.

Strength in housing prices is supporting household balance sheets, and reducing risks for banks where loans are collateralised against residential houses. Housing prices have increased or stabilised in many advanced economies, driven by strong labour market conditions, expectations that interest rates have peaked and, in some cases, solid increases in population relative to housing supply (Graph 1.4).

Graph 1.4
Graph 1.4: A two-panel line chart showing housing price indices in select advanced economies. Housing prices have increased or stabilised recently in many advanced economies.

Corporations have generally weathered the effects of higher interest rates, higher input costs and slowing growth. Solid earnings, and the ability to draw down cash buffers built up during the pandemic, continue to support corporate resilience in advanced economies, allowing firms to absorb higher interest rate expenses. Some firms were also able to lock in low fixed-rate borrowing costs during the pandemic and, for most regions, the share of debt held by listed firms with low interest coverage ratios (ICRs) has remained relatively steady throughout the monetary tightening cycle. By contrast, the share of debt in the United Kingdom held by firms with low ICRs remains above pre-pandemic levels. Business loan arrears and non-performing loans (NPLs) are near all-time lows; furthermore, while bankruptcies have increased in key jurisdictions, including in Australia, they are around pre-pandemic levels.

However, the financial position of some corporations would be challenged by a prolonged period of high interest rates and slow economic growth. Additional cash buffers established by listed firms during the pandemic have mostly been drawn down in a number of economies (Graph 1.5), though not Australia (see Chapter 2: Resilience of Australian Households and Businesses). Firms having to refinance large debt loads at higher interest rates, and those susceptible to margin pressure with low cash buffers, are most at risk. Authorities are therefore monitoring these risks closely in a number of economies.

Graph 1.5
Graph 1.5: A four panel graph showing cash buffers for non-financial corporates in the United States, United Kingdom, Canada and Europe. Across all jurisdictions, median cash buffers rose sharply through the pandemic and have since returned to around pre-pandemic levels. Each panel also shows the 25th and 75th percentile for cash buffers, demonstrating a wide range of buffers held for corporates.

Some higher risk borrowers in capital markets are facing more acute debt-servicing difficulties. Speculative-grade debt default rates have increased significantly since October 2023. This is especially the case for floating rate leveraged loans (which are often used to fund corporate buyouts), though defaults have been concentrated among smaller issuers this hiking phase. That said, most borrowers have been able to rollover their debt without severe difficulty, aided by accommodative conditions in primary and secondary markets in early 2024. Lower grade borrowers’ near-term refinancing challenges appear manageable, though their refinancing task will increase through 2025 and 2026. Debt maturities for speculative-grade borrowers – as a share of total outstanding bonds – will reach their peak during this period. Financial conditions and the state of the economy at that time will be key to whether this refinancing task proves problematic.

The banking sector generally remains well placed to weather potential stresses.

Large banks are well placed to weather a potential decline in asset quality or worsening in macroeconomic conditions. Large banks in advanced economies remain well capitalised. They also have large holdings of liquid assets (Graph 1.6), although the banking stresses in the United States and Switzerland last year demonstrated that deposit outflows can occur more rapidly than anticipated under regulatory frameworks introduced after the global financial crisis (GFC).[3] Increases in interest rates have generally supported banks’ profits, as lending rates have increased faster than deposit rates. Banks have increased their stock of provisions in recent quarters, but worse-than-expected outcomes for the global economy could prompt further increases in provisions from what are currently fairly low levels. Banks’ NPLs remained low overall over the second half of 2023, despite increases in some loan categories such as CRE and credit card lending. In recent credit lending surveys, banks have reported their expectation that credit quality will decline in 2024.

Graph 1.6
Graph 1.6: A two-panel bar chart. Left-hand panel contains common equity tier 1 ratios for large banks in six jurisdictions. In order from highest to lowest, they are: Other Europe, United Kingdom, Euro area, Canada, United States and Japan. Each bar is over 10 per cent. Right-hand panel contains liquidity coverage ratios for large banks in the same six jurisdictions. In order from highest to lowest, they are: Other Europe, United Kingdom, Euro area, Japan, Canada and United States. Every bar is over 100 per cent.

The regional banking sector in the United States continues to experience pressure on profitability. Since the March 2023 banking stress, deposit outflows have largely stabilised. However, competition for deposits among banks remains strong, which is increasing the cost of bank funding. On average, regional US banks’ profits fell as the cost of funding remained high, reflecting expensive wholesale borrowing and higher cost deposits (compared with larger banks). US regional banks’ exposure to CRE loans remains a key risk (see below).

1.2 Key global risks that could affect financial stability in Australia

Further weakness in the Chinese property sector could interact with longstanding macro-financial vulnerabilities in China and spill over to the rest of the world through trade channels and an increase in global risk aversion.

Stress in China’s property sector has largely been contained so far but there is a risk of contagion to other parts of the financial system. Property developers’ asset prices have remained at severely distressed levels despite authorities introducing additional measures to encourage banks to lend to the sector. While broader spillovers appear to be limited so far, there is potential for contagion to other parts of China’s financial sector, given the complex and opaque linkages between commercial banks, the property sector, local government balance sheets and NBFIs.[4]

Further property sector weakness could lead to a deterioration in banks’ asset quality. Banks’ capital levels remain relatively stable and well above regulatory minimums. The recent easing in monetary policy and authorities’ encouragement to banks to support weaker sectors of the economy have weighed on bank profitability. Reported NPL ratios remain low, though they are widely believed to be under-reported; the rolling over of local government financing vehicle loans and continued loan forbearance mask the quality of banks’ loan books. Local governments have increased the issuance of special purpose local government bonds to fund capital injections to small banks by drawing down on previous unused bond quotas; small regional banks with weak capital positions and narrow profit margins remain particularly exposed to stresses in the property sector.

Authorities have continued to balance the need to support growth in the near term against longer term financial vulnerabilities. Continued property sector weakness and associated financial stress could lead to a further weakening in household consumption and economic growth. Chinese authorities have eased monetary policy further and provided additional support for the property sector. However, they continue to balance efforts to support growth against many longer term financial vulnerabilities that could be made more challenging if other policy settings were to ease further. Regulatory measures focusing on strengthening bank capital and a new regulatory ratings framework to enhance supervision of ‘systemically important’ trust companies have been introduced.

Authorities have also taken targeted actions in response to risks emanating from parts of the financial sector. These include a renewed focus on local government debt resolution, by allocating an additional quota of refinancing bonds to allow local governments to issue bonds to bring off-balance sheet debt on to their balance sheets. Authorities have also overseen the winding up of Zhongzhi (one of the largest companies in China’s trust sector) without eliciting broader stress, while Evergrande (previously one of China’s largest and most leveraged developers) was recently forced into liquidation by a Hong Kong court.

Stress in China’s financial system could affect the global financial system, including Australia, via slower economic growth and increased risk aversion. The direct links between the Australian and Chinese financial systems are small; this is also true for most other advanced economies (Graph 1.7). The key channels of transmission of financial stress in China to Australia would likely be via a slowing in global economic activity, lower global commodity prices and reduced Chinese demand for Australian goods and services.

Graph 1.7
Graph 1.7: A one-panel bar graph with five bars representing five different types of advanced economy interactions. The share of exports is about 12 per cent; imports about 10 per cent; foreign direct investment about 4 per cent; cross-border financing about 2 per cent; and portfolio investment about 1 per cent.

Risks to the global financial system from deteriorating CRE markets remain elevated.

High interest rates and weak demand have continued to weigh on global CRE prices. Prices have fallen further from their peak and are now down 10–25 per cent in Europe and the United States. The prices of offices have been the most affected, reflecting a further increase in vacancy rates and a drop in landlord income. In the United States, office prices have fallen around 20 per cent since their peak, while other sectors have stabilised (Graph 1.8). Further falls are likely, at least in some market segments, given the lag with which CRE prices tend to adjust to poor conditions; price discovery has been hampered by transaction volumes that remain well below historical averages due to the gap between sellers’ and buyers’ price expectations and the absence of forced selling pressure. Real estate investment trusts continue to trade well below the value of their net tangible assets as investors expect further repricing in their underlying assets.

Graph 1.8
Graph 1.8: A one-panel line graph showing four categories of commercial real estate prices in the United States. Prices have fallen sharply for offices and multifamily real estate since the mid-2022. Prices have risen more recently for industrial property after a small decline, while prices have stabilised for retail property.

Some CRE borrowers – particularly those who own older or lower quality office buildings – are facing growing debt-servicing difficulties. High interest rates and elevated office vacancy rates (particularly in the United States) are weighing on landlords’ rental income. US bank loan quality for non-residential and multifamily buildings deteriorated again in the December quarter of 2023, though NPLs remain well below the peak reached during the GFC; the deterioration was predominately driven by office loans. European banks’ CRE NPLs increased over the second half of 2023 but remain very low relative to history; this has been driven by a rise in NPLs in Germany, whose banking system is one of the largest lenders to CRE in Europe. Loan delinquencies in the (largely US-based) commercial mortgage-backed securities market increased further, led by the office sector. The recent collapse of private Austrian-owned real estate firm Signa Holding highlights the ongoing challenge for highly leveraged real estate firms amid higher debt-servicing costs.

Distressed sales are currently limited but may pick up as loans are refinanced at higher rates in a weaker demand environment. Nearly US$500 billion in CRE debt will mature each year over the next five years, with bank debt accounting for around half of this. This includes a large number of shorter duration loans originated in 2021 and 2022 at peak prices and record-low interest rates; these will be the most challenging to refinance, particularly in the office sector.

Economies with banking systems highly exposed to CRE lending are more vulnerable to further deterioration in the CRE market (Graph 1.9). In the United States, regional banks remain vulnerable given they are around four times more exposed to CRE loans relative to their total assets than large US banks. Recent bank reporting has highlighted these exposures with several US and other international banks reporting large losses on US CRE loans, contributing to a significant sell-off in these banks’ shares. Further falls in CRE prices could be triggered if large, unexpected redemption requests at CRE investment funds force them to sell their CRE assets at large discounts.

Graph 1.9
Graph 1.9: A bar chart showing share of banking system assets exposed to CRE loans for several jurisdictions. The highest exposure is the United States, at 10 per cent, followed by Norway, Germany, Belgium, Sweden, Australia, Japan, Italy, Spain and then France (at about 3 per cent).

A disorderly adjustment in asset prices remains a risk to global financial stability.

Current pricing in financial markets appears to be predicated on market expectations of a soft landing in the global economy, and therefore remains vulnerable to negative surprises. Risk premia are compressed in corporate credit and equity markets (Graph 1.1; Graph 1.10), and volatility is low. Term premia in government bond markets are low, reflecting greater confidence that policy rates have peaked and speculation that the US Federal Reserve may soon reduce the pace of quantitative tightening. In the event of a shock, which could originate from outside the global financial system (e.g. from geopolitical tensions) or within the global financial system (e.g. from China, deteriorating CRE markets or inflation staying higher for longer), markets could rapidly reprice. Disruptions to global asset prices could be amplified by shortcomings in the management of leverage and liquidity mismatches, including by NBFIs in key financial centres.[5] In the extreme, this could lead to disruptions in key international funding markets that tighten financial conditions in Australia via market linkages and an increase in risk aversion.

Graph 1.10
Graph 1.10: A one-panel line chart showing equity risk premia for Australia, the United States, the United Kingdom, and Europe. The risk premia is calculated as the difference between the 12-months forward earnings yield for stocks and the real 10-year yield for government bonds. The graph shows that equity risk premia have declined recently across jurisdictions. For the United States in particular, the equity risk premium is at much lower levels compared to the past two decades. For Australia it is also somewhat low, though for Europe and the United Kingdom it remains elevated.


RBA (2023), ‘5.5 Focus Topic: Operational Risk in a Digital World’, Financial Stability Review, October; Jones B (2023), ‘Emerging Threats to Financial Stability – New Challenges for the Next Decade’, Speech at the Australian Finance Industry Association Conference, 31 October. [1]

Cai F and S Haque (2024), ‘Private Credit: Characteristics and Risks’, FEDS Notes, 23 February. [2]

Basel Committee on Banking Supervision (2023), ‘Report on the 2023 Banking Turmoil’, October. [3]

RBA (2023), ‘5.1 Focus Topic: Vulnerabilities in China’s Financial System’, Financial Stability Review, October. [4]

Choudhary R, S Mathur and P Wallis (2023), ‘Leverage, Liquidity and Non-bank Financial Institutions: Key Lessons from Recent Market Events’, RBA Bulletin, June. [5]