AU RBA Financial Stability Review

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. Reserve Bank of Australia observes that the likelihood of a major negative shock to Australia’s financial system has risen recently. RESERVE BANK OF AUSTRALIA CAUTIONS THAT THE MIDDLE EAST CONFLICT MAY TRIGGER A SIGNIFICANT INTERNATIONAL FINANCIAL DISRUPTION. ... Reserve Bank of Australia states that Australian banks are equipped to handle loan losses even during a severe economic downturn. RESERVE BANK OF AUSTRALIA INDICATES THAT HOUSEHOLDS AND BUSINESSES ARE GENERALLY IN SOLID FINANCIAL SHAPE AND UNLIKELY TO DESTABILIZE THE SYSTEM. ...

In an environment of heightened risk in the international system, stress events have the potential to interact with – and amplify – existing vulnerabilities and generate disruptive shocks. While April’s sharp global spike in market volatility did not give rise to significant financial stability concerns in Australia, this was likely helped by its short duration. Volatility in international financial markets has subsided over recent months – to long-run average levels or below – as the prospect of the most severe form of retaliatory global trade war receded somewhat. However, the international outlook remains clouded in uncertainty, including in relation to fiscal sustainability concerns in some advanced economies and the possible lagged effects of tariff increases on prices and activity in the United States. The risk of regulatory fragmentation across the international financial system has also increased, as jurisdictions pursue diverging priorities, including in banking and digital assets regulation. These uncertainties add to the growing risks to the financial system stemming from cyber and operational incidents. Physical and transition risks associated with climate change, including rising uninsurability, also remain of concern. With such a wide range of risks, the possibility of a material shock to the international financial system is rising. RBA: AUSTRALIA FINANCIAL SYSTEM WELL POSITIONED TO ENDURE ANY MARKET SHOCKS, GLOBAL DOWNTURN ... RBA Flags Asset Correction, Sovereign Debt Market Strain as Risks RBA: Majority of households keeping up with mortgage payments, have liquidity and equity buffers RBA: CASH FLOW PRESSURE ON HOUSEHOLDS EASED WITH LOWER RATES, INFLATION ...

Risks to the Australian financial system from lending to households, businesses and commercial real estate have remained contained. Budget pressures remain pervasive across the Australian community, but they have eased a little for some and the share of borrowers experiencing severe financial stress remains small, reflecting the continued strength in the labour market and the maintenance of prudent lending standards. After earlier increases, the share of households that have fallen behind on their mortgages appears to have stabilised at pre-pandemic levels and almost all borrowers now benefit from home values that exceed their mortgage balances (substantially so in many cases). Company insolvencies have picked up over the past couple of years to be at the top of the range observed in the 2010s – particularly among smaller firms that face a challenging operating environment – although on a cumulative basis they remain slightly below their pre-pandemic trend. Additionally, broader spillovers to the financial system have been limited, largely due to these firms’ small size and limited bank debt. Overall, most household and business borrowers and owners of commercial real estate have been able to manage the pressures on their finances. This has helped maintain credit quality across the financial system. RESERVE BANK OF AUSTRALIA FINANCIAL STABILITY REVIEW: US TARIFF UNCERTAINTY POSES SUBSTANTIAL HEADWINDS TO GLOBAL GROWTH TARIFFS COULD HAVE CHILLING EFFECT ON BUSINESS INVESTMENT, CONSUMER SPENDING RISK OF DISORDERLY CORRECTION IN GLOBAL ASSET PRICES, PUTTING PRESSURE ON…

The finances of many households and businesses in advanced economies continue to be resilient, despite ongoing pressure from tight monetary policy and inflation. This resilience has been supported by firm, albeit softening, conditions in labour markets, a stabilisation or pick-up in real household incomes, and solid corporate earnings. While there is a small but growing group of borrowers experiencing financial stress in these economies, a further easing in inflation − and with it, lower policy rates − is expected to support the ...

Financial market participants have been increasingly optimistic about the prospects for a soft landing in the global economy. A substantial easing cycle in monetary policy is expected over the next two years or so, with inflation returning to central banks’ targets and unemployment rising only modestly. Although pressures from high inflation and tight monetary policy continue to weigh on many households and businesses, a number of developments – including the resolution of supply chain disruptions, declines in energy prices, continued strength in labour markets, strong household balance sheets and solid corporate earnings – have contributed to the global economy’s resilience to date. The capital position of large international banks leaves them well placed to weather a decline in asset quality and/ or worsening macroeconomic conditions. However, several economies, including the United States, have a sizeable tail of smaller banks, some of which are more vulnerable due to asset quality and profitability concerns. Although risks to the outlook for the global economy have become more balanced as inflation has eased, risks to global financial stability remain. These risks have the potential to spill over to the Australian financial system, v RBA Financial Stability Review: Most Borrowers Seen Coping If Rates Stay Higher For Longer - Banks Expect Arrears To Rise A Bit Further But Remain Low RBA: HOUSEHOLDS HAVE TRIMMED SPENDING, ARE UNDERPINNED BY STRONG JOBS MARKET, SAVINGS BUFFERS RBA: GLOBAL RISKS INCLUDE CHINA PROPERTY, COMMERCIAL REAL ESTATE, ASSET PRICE CORRECTION, GEOPOLITICS

Global financial stability risks are elevated, reflecting challenging macroeconomic conditions. The increase in inflation and interest rates since 2021 has put pressure on household and business finances in Australia and around the world. It has also exposed vulnerabilities in parts of the international banking system, in some non-bank financial institutions (NBFIs) and in segments of global financial markets. Periodic episodes of stress in some economies, including the banking stress in the United States and Switzerland in March 2023, have required intervention by policymakers to support financial stability. Households and businesses in advanced economies have been largely resilient to date, despite a challenging set of economic conditions that includes high inflation, restrictive monetary policy settings and slowing growth. Low levels of loan arrears and high levels of capital and liquidity continue to support stability in the global banking system. However, global financial stability risks remain elevated. RBA: AUSTRALIAN FINANCIAL SYSTEM SOUND, SOME POCKETS OF STRESS AMONG HOUSEHOLD BORROWERS RBA: AUSTRALIAN BANKS WELL CAPITALISED, HAVE LOW EXPOSURE TO COMMERCIAL PROPERTY RBA: ANY INCREASE IN UNEMPLOYMENT WOULD ADD TO STRESS, BUT UNLIKELY TO THREATEN SYSTEM OVERALL

Global financial stability risks have increased despite loan arrears remaining very low. Some regional banks in the United States failed in March because of weaknesses in their business models and risk-management practices. Heightened risk aversion led to an increase in volatility in some financial markets and to liquidity stress transmitting to other parts of the international banking system. This culminated in the regulator-facilitated takeover of Credit Suisse by UBS, following a lengthy period of concerns being raised about ...