Financial Stability Review – October 20254.1 Focus Topic: How Overseas Shocks Can Affect Financial Stability in Australia
Given the heightened international risk environment, understanding how overseas shocks could test the resilience of the Australian financial system is a key focus for regulators and industry. International shocks can affect the Australian financial system via global financial markets, the digital and physical infrastructures underpinning the financial system, and trade. This Focus Topic sets out how these three channels are likely to operate, the types of Australian entities most directly exposed to each and identifies potential factors that may mitigate the impact of shocks. (For a discussion of specific overseas shocks that might arise in the current environment, see Chapter 1: The Global Macro-financial Environment.)
International shocks could affect the stability of the Australian financial system through various channels.
A significant increase in risk aversion in global financial markets has the potential to sharply increase funding costs and limit access to credit and liquidity for Australian businesses, financial institutions and households. Australian companies, banks and superannuation funds have taken steps to mitigate their exposure to global financial market shocks, including by building significant liquidity buffers over recent years. Any depreciation of the exchange rate in such an event could also play a shock-absorbing role.1 However, an extreme event could still pose financial stability risks.
The advancing digitalisation and interconnectedness of the Australian financial system has also increased the risks to financial stability from operational disruptions emanating from offshore. A disruption in the digital or physical infrastructure underpinning the financial system has the potential to have a direct and rapid impact on the financial system and economy. Building operational resilience in the Australian financial system is a regulatory priority.2
Trade shocks have the potential to create financial stress among trade-exposed businesses, though the export sector has some resilient characteristics and comprises a relatively small share of Australian banks’ lending. While the immediate financial stability risks from a trade shock are likely to be modest, the ultimate impact would depend on the broader economic and financial impacts over time.
The relative importance of each channel, and extent of financial stability risks they give rise to, will depend on the nature of the shock and surrounding circumstances – including policy response domestically and abroad – at the time.3
Overseas shocks could impact the Australian financial system via global financial markets.
International shocks can transmit to the Australian financial system through a significant increase in risk aversion in global financial markets. This could sharply increase financing costs, including in Australia, and restrict businesses’ and financial institutions’ access to funding and liquidity in global markets. If sustained, it could also contribute to liquidity strains for Australian banks and non-bank financial institutions (NBFIs), such as superannuation funds, and lead to sharp asset valuation losses. A tightening in financial conditions would also intensify financial pressures on domestic borrowers and, if severe enough to strain financial institutions’ balance sheets, could limit credit availability in the Australian economy. However, there is considerable scope for most borrowers and lenders to draw on buffers if a liquidity shock occurs. If the exchange rate depreciated in such circumstances, the net foreign currency hedges of Australian banks would benefit, but foreign currency hedges for Australian super funds would give rise to additional Australian dollar costs.
While large corporations have taken steps to mitigate offshore refinancing risk, their cost of funding would still be likely to increase in the event of tighter international financial conditions.
Corporate bonds comprise approximately one-quarter of large business debt in Australia and the majority of this is issued in offshore markets (Graph 4.1.1). The relatively long tenor of these bonds (nine years in dollar-weighted average terms) helps to mitigate the rollover risk of this funding if a shock in global markets occurs. In addition, in recent years, the depth of the Australian corporate bond market has improved, giving corporations access to more volume and longer tenors in the domestic market than was previously available.4 Australia’s strong banking system could also be an alternative source of credit for businesses if access to offshore funding were to reduce. A significant shock in global financial markets would, however, also spill over to domestic markets, so some refinancing risk would remain.
Around one-third of equities and bonds issued domestically by non-financial corporations are owned by foreign investors. A reduction in demand or asset fire sales by these investors represents another channel through which stress from an overseas shock could spill over to Australian markets. A severe enough tightening in global financial conditions could also affect domestic credit availability to the extent that financial institutions’ balance sheets were strained.
Even if large corporations can continue to access sufficient funding in the face of a shock to global financial markets, investors would be likely to demand higher risk premia, raising the cost of both domestic and offshore funding.
Australian banks have reduced, but not eliminated, exposure to offshore funding risk.
Australian-owned banks’ assets are highly concentrated in Australia and New Zealand. On a consolidated basis (including foreign subsidiaries), just over 24 per cent of Australian banks’ exposures are claims on non-residents, more than one-third of which are claims on New Zealand by the major Australian banks (Graph 4.1.2).
Australian banks have reduced their reliance on offshore funding over time, although a degree of rollover risk remains.5 Following the global financial crisis, Australian banks turned to less risky funding with an emphasis on replacing short-term wholesale debt (much of which was placed offshore) with domestic household deposit funding, which is considered the most stable source of funding. Consequently, the share of Australian banks’ debt funding sourced from abroad has declined from around 25 per cent in 2007 to just over 10 per cent, as at June 2025 (Graph 4.1.3). While around 45 per cent of this is short-term debt, the maturity profile of the long-term debt helps to mitigate rollover risk. The weighted average remaining maturity of Australian banks’ outstanding offshore bonds (issued with more than 12 months’ maturity) is more than four years, which is materially longer than for domestic bonds. Australian banks’ strong long-term credit ratings and their hedging of foreign exchange risk (with these hedges typically matching the average duration of their funding) also help mitigate the impact of an international shock.6 Banks’ offshore high-quality liquid asset holdings further reduce rollover risk.
Foreign ownership accounts for around one-third of banks’ domestically issued equities and bonds, representing another channel through which a tightening in global financial conditions could transmit stress to Australia. Furthermore, the cost of banks’ domestic and offshore funding would be likely to rise as investors demand higher risk premia.
Superannuation funds’ practices help mitigate the transmission of overseas shocks to Australia, but some risks remain.
Superannuation funds invest a large and growing proportion of their portfolios in offshore assets. The ongoing expansion of superannuation funds means they now hold assets equivalent to around 160 per cent of Australia’s GDP. Superannuation funds have therefore had to increase their offshore investments to diversify their portfolios and ensure access to liquid markets, and this trend is expected to continue. As of June 2025, funds regulated by the Australian Prudential Regulation Authority (APRA) held 30 per cent of their assets in offshore listed equities and 6 per cent in offshore fixed income investments (Graph 4.1.4).
Superannuation funds’ investment and hedging strategies can help to mitigate financial stability risks. Given the mostly defined-contribution nature of the Australian superannuation system, investment losses arising from an overseas shock are borne by fund members and do not threaten the solvency of licensed superannuation funds or their counterparties (a feature that distinguishes them from other pension fund systems abroad).7 To protect against member losses, these funds tend to hedge a portion of their foreign exchange exposures; in aggregate, this share is around 22 per cent for listed equities and higher for other asset classes like fixed income. These hedges could generate liquidity pressures for funds during a significant depreciation in the Australian dollar, potentially requiring them to draw down cash balances to roll hedges that are out-of-the-money or pay margin.8 However, most hedges contracted by superannuation funds do not require margin payments, and in recent years the industry has made more use of staggered maturities to limit rollover risk. The unlevered and long-term focus of most superannuation funds’ investment strategies also means they have been well placed to support financial stability during earlier periods of stress (see Chapter 3: Resilience of the Australian Financial System).
However, a severe global shock that requires superannuation funds to raise liquidity domestically could amplify financial system stress. Given the concentration in bank bill ownership by superannuation funds, if they sought to redeem a significant share of their holdings simultaneously in response to a global shock, bank bill swap rate spreads would increase and short-term bank funding would likely reduce (see Chapter 3: Resilience of the Australian Financial System). This would also transmit higher rates to other linked markets, affecting banks’ broader funding costs. As the superannuation sector continues to expand, its management of liquidity and foreign exchange risk will become increasingly important; APRA’s supervisory approach for this across the sector is being enhanced accordingly.
Overseas shocks could also impact the Australian financial system via its underpinning digital or physical digital infrastructure.
The advancing digitalisation and interconnectedness of the Australian financial system increases the risks to financial stability from operational disruptions emanating from offshore.
The financial system has become more interconnected, both domestically and internationally, as the dependence on external providers has increased. As a result, operational disruptions or policy changes overseas could affect Australian financial institutions’ access to global financial market infrastructure.9 Heightened international tensions also increase the prospect of attacks on operations of Australian financial market infrastructure, a key financial institution or the wider national infrastructure on which these, in turn, rely.
A major operational disruption has the potential to have a direct and rapid impact on the financial system. Depending on the surrounding circumstances, this could also undermine public confidence in the Australian financial system. The cyber-attacks on the superannuation sector earlier in 2025 highlighted the potential consequences of operational disruptions and the importance of that sector continuing to build resilience to them. Other examples in recent years, such as the 2024 Crowdstrike operational incident, demonstrate the increasing (and sometimes opaque) third-party concentration risk in critical services, including where these are provided offshore.10
Strengthening crisis readiness and cyber and operational resilience in the Australian financial system is a regulatory priority. APRA’s new prudential standard on operational risk management, CPS 230, is aimed at ensuring APRA-regulated entities, including superannuation funds, are resilient to operational risks and related disruptions.11 As part of managing risks arising from external providers, financial institutions are now required to report their use of material service providers. Over time, this will improve visibility of where provider concentration risks lie.
The trade channel is another way that overseas shocks could impact the Australian financial system.
A large trade shock involving one of Australia’s significant trading partners would reverberate through the Australian financial system, though some features of the export sector support resilience.
As a small open economy, a large international trade shock would create stress among a range of Australian businesses. A global economic downturn or the introduction of trade restrictions by key trading partners, such as tariffs and import quotas, would decrease demand for Australian exports.12 This would in turn adversely impact the cash flows of Australian exporters and, if severe enough, their ability to meet their debt obligations. This could have consequences for their employees, creditors and suppliers, thereby potentially spreading financial stress to other firms.
While Australia’s mining sector is heavily export-dependent, it also has some features that mitigate financial stability risks that could otherwise arise from trade shocks. The mining sector accounts for over 60 per cent of Australia’s goods exports, and the sector derives most of its revenue from exports.13 Australia’s mining exports are produced by large firms that are relatively low-cost producers of bulk commodities. This gives them a comparative advantage over overseas producers in the face of a negative shock to global demand.14 On a revenue-weighted basis, export-intensive firms (defined here as firms that derive more than 25 per cent of their revenue from export) account for around 90 per cent of the mining industry (Graph 4.1.5). These firms’ hedging practices also help to limit the effects of commodity price and exchange rate movements. As the mining sector accounts for less than 3 per cent of business credit, this should limit the transmission of financial stress to their domestic lenders in severe downside scenarios.
Looking beyond the mining sector, export-intensive firms make up a relatively small share of Australian businesses and Australian banks’ lending. While around half of Australia’s export-intensive firms are within the wholesale and manufacturing sectors – sectors which together account for around one-fifth of Australia’s production for exports – these firms account for just over 10 per cent of businesses within these industries on a revenue-weighted basis (Graph 4.1.5).15 While banks have sizeable exposures to the wholesale and manufacturing industries (accounting for around 10 per cent of aggregate business lending), only a proportion of these are to export-intensive firms and many of these loans are likely to be secured. However, exporter stress arising from trade-related revenue shocks could still transmit to creditors, especially through unsecured credit channels such as working capital loans or trade credit, as well as to exporters’ suppliers and employees.
Exporters with diversified customer bases or greater ability to adapt to demand are less likely to propagate financial stress. For example, some firms have been able to manage previous trade-related revenue shocks by redirecting sales to other markets (including domestically). In addition, some firms, such as wholesalers, might be able to scale down their operations in response; though this will still negatively impact their employees and suppliers (as discussed below). By contrast, small manufacturers without diversified export markets or products are more likely to be susceptible to external shocks.
Exporters tend to have somewhat stronger balance sheets than other firms, which can support their resilience to trade shocks. Export-intensive small and medium-sized firms (SMEs) tend to hold larger cash buffers – covering three months of operating expenses on average – than other SMEs, which could support their ability to withstand temporary trade-related revenue shocks (Graph 4.1.6). While large export-intensive firms have similar cash buffers to other large businesses, they have lower leverage on average; data on leverage is limited for smaller firms. Furthermore, non-mining, goods-export-intensive firms account for less than 2 per cent of both employment and total liabilities across operating businesses. These factors should limit the extent of immediate spillovers from a global trade shock to other financial system participants.
Suppliers to exporters are also susceptible to trade shocks. Focusing on the number of export-intensive businesses understates the number of firms that are exposed to cash flow risks from trade shocks. For example, while agricultural exports account for around 10 per cent of Australia’s total exports, agricultural firms account for a lower share of export-intensive firms because they tend to sell products via exporting wholesalers. The responses of export-intensive firms to trade shocks (e.g. if a wholesaler scales down and reduces its orders from suppliers) can in turn transmit financial pressure to their suppliers.
Overseas shocks can also affect businesses and consumers via other channels, though their effects on cash flows seem unlikely to pose immediate financial stability risks. For example, adverse shocks in major overseas commodity producers can increase the price of highly traded commodities such as crude oil, food and fertilisers, which in turn can lead to increases in prices of downstream goods. Supply chain disruptions can also affect businesses’ costs and their ability to meet consumer demand. The effects on business cash flows will depend on firms’ cost structures and their ability to pass on higher costs to consumers. More broadly, an international shock that negatively impacts consumer and business sentiment may lead to reduced consumption and investment, and in turn reduced incomes.
Endnotes
Hendy and Beckers find that over the 1990–2019 period, the exchange rate and domestic monetary policy have effectively buffered the Australian economy from global shocks. See Hendy P and B Beckers (2024), ‘How Do Global Shocks Affect Australia?’, Research Discussion Paper No 2024-10. 1
Jones B (2025), ‘Anti-fragility and the Financial System’, Opening Remarks to FINSIA: The Regulators, Sydney, 12 September. 2
APRA’s first system stress test – being conducted this year – will add to our understanding of the potential financial stability risks that could arise from overseas shocks. This exercise involves exploring the impact and potential feedback loops from a significant financial market disruption alongside a major operational risk event, including transmission between the banking and superannuation sectors in Australia. See APRA (2025), ‘APRA Corporate Plan 2025-26’, August. 3
See Jacobs D (2025), ‘Australia’s Bond Market in a Volatile World’, Address to Australian Government Fixed Income Forum, Tokyo, 12 June. 4
The overseas subsidiaries of the Australian banks also raise funding through deposits in their own jurisdiction. 5
Bellrose K and D Norman (2019), ‘The Nature of Australian Banks’ Offshore Funding’, RBA Bulletin, December. 6
The impact of investment losses on fund members depends on how close to retirement they are and whether the losses are sustained. Members that are in or close to the decumulation phase may be forced to realise losses, which will affect their retirement income. 7
For a discussion of the longer term structural challenges for super funds’ foreign exchange hedging practices, see Hauser A (2025), ‘A Hedge Between Keeps Friendship Green: Could Global Fragmentation Change the Way Australian Investors Think About Currency Risk?’, Remarks delivered to the Board of CLS Bank International, Sydney, 16 September. 8
For a discussion of the implications of digitalisation for financial stability in Australia and how it impacts key vulnerabilities, see RBA (2025), ‘4.2 Focus Topic: Looking at Digitalisation through a Financial Stability Lens’, Financial Stability Review, April. 9
For details, see RBA (2024), ‘Box: Recent Operational Incidents at Third Parties’, Financial Stability Review, October. 10
APRA (2025), ‘Prudential Standard CPS 230: Operational Risk Management’, July. 11
For a discussion of the impact of recent US tariffs on Australian trade, see RBA (2025a), ‘Box A: How Might Tariffs Affect Australian Trade?’, Statement on Monetary Policy, May; RBA (2025b), ‘Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?’, Statement on Monetary Policy, August. For a discussion on Australia’s trade exposures and a framework of key transmission channels of recent trade developments for Australia, see Hunter S (2025), ‘Joining the Dots: Exploring Australia’s Economic Links with the World Economy’, Speech to Economic Society of Australia (Queensland), Brisbane, 3 June. 12
See RBA (2025a), n 12. 13
See Hunter, n 12. 14
The share of total production used for exports contributed by the manufacturing and wholesale sectors is calculated using the input-output tables published by the Australian Bureau of Statistics. It includes income from exports of goods and services. 15