Financial Stability Review – March 2026Financial Stability Assessment

Global financial stability risks are elevated in a rapidly evolving international environment.

Escalation of conflict in the Middle East has sparked a sharp increase in volatility in global financial markets, following a period of benign market conditions. Volatility has been particularly pronounced in energy and other commodity markets, and this has spilled over to other asset classes. Just prior to the escalation of the conflict, some firms had experienced sharp equity price declines as investors reassessed the prospects for AI to affect business models. Conditions for private credit markets had also become more challenging.

Yet risk premia in global equity and credit markets have remained fairly low by historical standards. Additionally, even after an increase in government bond yields in several advanced economies, measures of sovereign bond term premia were well within historical ranges and markets remained functional. Resilience in the global financial system prior to the escalation of the conflict had been supported by systemically important banks remaining profitable and well capitalised, and growth in the global economy over the past year exceeding most analyst expectations, with trade flows adjusting relatively quickly to changes in tariffs. Corporate and household balance sheets in advanced economies have remained strong, although pockets of stress persist among non-prime borrowers.

Global financial stability risks remain elevated due to heightened geopolitical tensions and several sources of uncertainty. The global economic and financial outlook could deteriorate abruptly for any number of reasons, such as:

• Potential for elevated geopolitical tensions to spillover into a severe international shock. The geopolitical environment remains highly fluid. The conflict in the Middle East could trigger a larger shock that destabilises the global economy, particularly if supply disruptions to oil and other commodity markets are prolonged. Tensions among major global powers also have the potential to escalate, hostile cyber and other actions are intensifying, and strains in the international rules-based order are increasing alongside the risk of global geoeconomic fragmentation.
• Potential for a sharp revision of the outlook for AI-related investments. Should expectations around the productivity benefits of the surge in AI-related investment be reduced, it could lead to a significant downgrade in profitability forecasts and asset valuations. Negative consequences for asset quality in the financial system and investment plans in the real economy could result.
• Potential for confidence in institutional arrangements to be undermined or regulatory divergence. A sustained pattern of unconventional policy actions and a push for regulators to rebalance regulatory frameworks in favour of growth (relative to stability) could also undermine established institutional arrangements in some jurisdictions or lead to material regulatory divergence globally. This could affect policy credibility, give rise to a new wave of regulatory arbitrage and present additional challenges for multilateral cooperation.
• Potential for a disruptive crystallisation of macro-financial vulnerabilities in China. Chinese authorities have identified strong supply growth in the industrial sector and weak domestic demand continue to characterise the Chinese growth model, which, combined with low inflation relative to trading partners, has led to a real exchange rate depreciation. This has contributed to strong exports and a rising current account surplus, which has amplified tensions with some trade partners. Longstanding vulnerabilities in parts of the Chinese financial system – including banks, non-banks and local governments – have been exacerbated by the ongoing weakness in the Chinese real estate sector. Debt in the corporate sector continues to rise sharply as a share of GDP. Consolidated public debt in China is also expected to rise further, particularly given the need to support highly indebted local governments. A disruptive crystallisation of these vulnerabilities could sharply increase risk aversion in global financial markets and result in reduced Chinese demand for Australian goods and services.

This environment increases the prospect for international developments to interact with existing vulnerabilities and affect financial stability in Australia.

A disruptive adjustment in international financial markets could pose financial stability challenges in Australia. Two global vulnerabilities stand out in this regard:

• Vulnerabilities arising from a large and growing stock of sovereign debt in key advanced economies, which could be subjected to a disorderly repricing if debt sustainability concerns were to escalate. A sharp sell-off could be amplified by the growing role in these markets of leveraged, price-sensitive non-bank financial institutions (NBFIs). Projected fiscal deficits in a range of advanced economies are expected to add further to the supply of sovereign debt in the years ahead, at a time where price-sensitive NBFIs are becoming a key source of marginal demand. The historical experience suggests a sharp repricing or period of disorderly functioning in key international sovereign debt markets could spill over to Australian bond markets, presenting challenges to financial stability (discussed in more detail below).
• Vulnerabilities arising from low risk premia and concentrated exposures in key international equity and credit markets, with the potential for disorderly price adjustments amplified by leverage and liquidity mismatches in global NBFIs. Global equity and bond markets remain vulnerable to sharp corrections. Ongoing significant increases in exposure to the AI investment cycle across the financial system could also become a source of instability if the optimistic outlook for that sector is substantially revised. More generally, a further escalation in geopolitical tensions, or adverse policy or macro-financial developments, could trigger a sustained increase in risk aversion across global financial markets.

A disruptive adjustment in international markets could spill over to Australia by sharply increasing domestic financing costs, restricting Australian firms’ and financial institutions’ access to funding and liquidity in global markets, and leading to substantial losses in the value of financial assets, including those held by households. If severe enough, it could also limit credit availability in Australia and have consequences for the real economy. Australian companies, banks and superannuation funds have taken steps to mitigate their exposure to shocks in global financial markets in recent years, including by building significant liquidity buffers, and any depreciation of the exchange rate could also play a shock-absorbing role for the Australian economy. However, a more shock-prone international environment means it is important that Australian borrowers and lenders maintain resilience.

Growing operational complexity and interconnectedness across the financial system is increasing non-financial vulnerabilities. These heighten the potential for operational incidents to have systemic financial consequences, including if they interact with other stress events. For example, an outage at a major financial institution or a service provider used by many financial institutions could disrupt funding markets or stop households and businesses from accessing their money. Operational resilience in the payments system and across financial market infrastructures is particularly critical to ensuring the steady flow of funds throughout the economy. Complexity and interconnectedness can also increase as new technology is introduced to the financial system and has to interact with existing technological infrastructure. When episodes of financial and operational stress occur simultaneously, it also complicates the nature of crisis response and the scope of coordination required across regulators, government and industries.

The Australian financial system has a good degree of resilience, though the risk of a more material adverse shock has increased over recent weeks.

If a significant economic downturn occurs, Australian banks are well positioned to absorb significant loan losses while continuing to support the economy through lending to households and businesses. Banks are well capitalised and have maintained prudent lending standards and provisioning. Non-bank lenders and private credit firms have increased the availability of credit for both housing and business borrowers, which could result in higher loan losses in the years ahead, but their relatively small size means the systemic impact of stress in this sector would be limited. Some borrowers continue to experience severe financial stress, but overall loan losses have remained low by historical standards, reflecting strong collateralisation of loans and the relatively small increase in non-performing loans over recent years. Banks’ liquid assets provide a buffer against unanticipated liquidity shocks, but it is important that these can be converted quickly into cash when necessary.

As a large and growing part of the overall financial system, it is important that the superannuation sector continues to strengthen its approach to risk management. The value of assets managed by the superannuation sector now represents around 160 per cent of GDP, one-third of Australian financial system assets, and is expected to continue growing solidly until at least 2050. This growth, coupled with an increasing share of Australians drawing retirement income streams from the system, means that further strengthening of superannuation funds’ governance, liquidity and operational risk management practices will remain a key focus for regulators.

The general insurance sector is not currently a source of financial stability concern, but insurance affordability and availability may become increasingly challenging over time. The general insurance sector has remained well capitalised and profitable. Home insurance premiums remain at historically high levels and further increases could increase underinsurance, lowering the credit quality of housing loans over time. The forthcoming Climate Vulnerability Assessment by the Australian Prudential Regulation Authority’s (APRA) will help quantify how general insurance affordability may be affected by climate change.

The strong financial positions of most Australian households and businesses means that they are unlikely to be a source of instability, though financing pressures will increase for some if inflation is higher for longer than currently forecast. Borrowers are generally well placed to weather cost pressures stemming from the conflict in the Middle East and higher interest payments, though the most vulnerable borrowers will face growing challenges. Loan arrears have remained at low levels, supported by strength in the labour and housing markets. Company insolvencies have stabilised at around longer run averages at an economy-wide level, although the share of companies entering insolvency remains elevated in the hospitality and construction sectors – where the operating environment has been more challenging, particularly for smaller firms. Fundamentals continued to improve across most commercial real estate (CRE) markets and there continues to be little evidence of financial stress among owners of Australian CRE.

In this environment, financial institutions need to maintain focus on their resilience.

It is important that lending standards remain prudent, and that regulation continues to limit the build-up of systemic risk and foster confidence in the financial system, given the backdrop of strong credit growth. While overall lending standards have remained sound, there is early evidence that some forms of riskier lending have picked up. Household indebtedness has been a key vulnerability domestically for many years, and high debt-to-income (DTI) lending to investors has increased of late, though remains below APRA’s recently implemented limit on high DTI lending. High loan-to-valuation ratio lending to first home buyers has also increased alongside the expansion of the Australian Government 5% Deposit Scheme in October 2025. Heightened competition for business loans over recent years as bank and non-bank lenders seek to expand their business lending has supported credit availability for some businesses and reduced refinancing risks. Relatedly, there has been a slight easing in CRE lending standards over the past year and incremental increases in risk appetite to lend to other businesses more recently. However, there has been little evidence of a broader decline in business lending standards to date.

The RBA and other CFR agencies continue to monitor lending conditions closely and are working together to deliver better regulation of the financial sector without compromising financial stability, consumer protection and market integrity. In addition, the International Monetary Fund will be conducting an assessment during 2026 of the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises as part of its Financial Sector Assessment Program.

Enhancing resilience to operational and geopolitical risk is a regulatory priority around the world, including in Australia. Recent operational incidents in Australia and abroad have highlighted the prospect for serious spillover effects to occur across a financial system that has become more complex and interconnected over time. These vulnerabilities are increasingly targeted by sophisticated malicious actors, including state-sponsored attackers, who can seek to co-opt or collaborate with insiders that have greater access to systems. In Australia, CFR agencies are actively working with industry to strengthen the operational and cyber resilience of individual financial institutions, and the system as a whole. The RBA is also strengthening its operating model to support the critical payments settlements system more effectively, including by enhancing its cybersecurity controls and modernising core technology infrastructure. To support the Payments System Board’s strategic objective to strengthen the resilience of the payments system, the RBA is actively pursuing a program of work aimed at identifying system-wide vulnerabilities in Australia’s payments system. Over the course of 2025, CFR agencies have also worked with large financial institutions on scenario analysis to ensure there is a clear understanding of the potential impact of adverse geopolitical events, and on the development of robust payment system contingency capabilities. As part of this work, CFR agencies are strengthening their engagement with relevant government agencies and industry to support better information sharing and response coordination for extreme-but-plausible events.