The RBA has also held interest rates steady, but it delivered dire warnings that risks to global financial stability are heightening in a recent half-yearly Financial Stability Review. Emphasising the importance of maintaining domestic policy stabilisation, the RBA noted that there is an increasing probability of a material shock to the international financial system, rather than a decrease in such probability.
Global asset markets are prone to severe corrections
Risks to the global financial system are not ebbing; they are “rising”, and Australia certainly is vulnerable. While the enormous decline in stock and bond markets following Donald Trump’s 20 April Liberation Day tariff announcement was brief, the RB has said risks have been “at large strides for the worst with the outlook clouded in uncertainty”.
“It wrote a cautionary note of a material shock to the international financial system becoming more likely,” it said.
First of those is that major stock price disruptions seem due insofar as share and other asset prices have continued to rise, with investors valuing as if we were perfect and taking an exceptionally small chance that anything could go wrong.
Tech concentration increases market imbalances
The Reserve Bank pointed out investor concentration in the ten largest firms on the US share market that were primarily internet technology (IT) driven and now represented more than forty per cent of the S&P 500 index. Re-evaluation would put international financial markets at risk of sharp corrections, the RBA warned.
Cyber attacks threaten widespread financial system disruption
And a fundamentally important risk identified by the Reserve Bank is the risk of systemic cyber disruptions, including physical computer attacks, leading to a progressively worse systemically relevant crisis as a result of the market distress. As the digitalisation of the financial system progresses, the chances of cyber-attacks and operational incidents having a systemic impact, according to the RBA, are also increasing.
The bank is also deeply concerned with the growing use of shared IT service providers for large financial institutions. The bank warned that as the nation is increasingly relying on a concentrated network of essential service providers, the impact of a technology outage has the potential to spread system-wide. The RBA said that its modelling indicated that even under extreme scenarios, less than 4 percent of borrowers would fall behind.
Australian households are financially remarkably resilient
While the RBA continues to have a strong interest in global economic and financial risks, it appears to be increasingly reassured about the situation of Australian households. The RBA said that, broadly speaking, the vast majority of mortgage holders are managing their repayments and have very large savings buffers to see them through the period of rapidly rising interest rates and consumer prices.
On how many of our households are at risk, the calculations went downwards as the Reserve Bank had tracked owner-occupier loans going into combinations they could sell, they had estimated from peaks of around 5 percent that only about 2 percent of variable loans were overspending by more than what householders were creditable for. Over half say they have at least six months’ worth of savings cushions. The RBA said increasing real wages due to the fall in the inflation rate, the cut in income tax, and lower interest rates have all played a role in improving households’ financial position.
The RBA notes latest assessment shows a financial world of contrasts between domestic strength and an increasing number of global threats. The warnings about fragility around the world highlight the interconnected nature of modern financial systems, and while Australian households have been able to demonstrate resilience in their financial well-being, and returned to some degree of mortgage stress ease.