The Reserve Bank of Australia (RBA) has warned that global financial stability risks remain high following the exposure of vulnerabilities in the international banking system.
In its semi-annual Financial Stability Review released on Thursday, the RBA assessed that heightened risk aversion caused a surge in volatility across various financial markets and resulted in liquidity stress that spread to different sectors within the international banking system.
This, the central bank said, ultimately culminated in the takeover of Credit Suisse by UBS last month.
But despite describing these high-profile events, including the collapse of three banks in the US, as “the most severe banking-system stress event since the global financial crisis”, the RBA assessed that the broader global banking system remained resilient.
“Regulators moved quickly to address the failing banks and following a step-up in liquidity operations by central banks, financial conditions have stabilised,” the central bank said.
It, however, emphasised that the fragility of certain banks and the potential for further stresses could lead to tighter financial conditions.
Moreover, the RBA acknowledged the possibility of a sharp tightening in financial conditions globally if inflation remains persistently high, which would, in turn, lead to significant declines in financial asset and property prices, disrupting key funding markets and straining the balance sheets of some borrowers and lending institutions.
While conceding that Australia was not immune from the deteriorating outlook for global financial stability, the RBA stated that the country’s financial system entered this “more challenging” period in a strong position and was well placed to continue supporting the domestic economy.
“Banks are well regulated, strongly capitalised, profitable, and highly liquid. This leaves them well positioned to continue lending to Australian households and businesses,” it said.
The central bank highlighted the work done by the Australian Prudential Regulation Authority (APRA), which, it said, had intensified its oversight of domestic financial institutions during the recent period of stress.
Alongside the RBA and other members of the Council of Financial Regulators, APRA is said to be closely monitoring for any adverse impacts on the broader financial system.
“Like other regulators around the world, APRA is also considering the lessons that should be drawn from recent events,” the RBA added.
“It is important that financial institutions in Australia continue to invest in their capacity to absorb shocks by maintaining strong capital and liquidity buffers and increasing their operational resilience, including to external threats like cyber attacks.”
As part of its review, the RBA said that higher interest rates, slowing economic growth, high inflation, and geopolitical tensions were adding to the financial stability risks globally.
“Higher interest rates, high inflation, and tightening lending standards will likely lead to stress among some borrowers, particularly if (as expected) economic growth slows and labour market conditions soften,” it said.
“In addition, a further escalation in geopolitical tensions remains a prominent risk to global economic activity and the outlook for financial stability.”
Cyber and climate change remain key risks
Moreover, the central bank flagged cyber risk as one of the “key risks” facing the global financial system.
Reflecting on a number of recent high-profile cyber attacks in Australia, the RBA said cyber attacks on Optus and Medibank demonstrated the potential for spillovers to the broader financial system.
“Banks in Australia continue to report a heightened level of fraud and scams, and information from liaison indicates that cyber criminal activity continues to increase in sophistication,” the bank warned.
“Financial institutions are continuing to invest in their cyber security and response capabilities, aligning their systems and procedures with best practices to mitigate cyber risks. The government and regulators are also continuing to work with financial institutions to further develop the resilience of the financial system,” it said.
On the climate front, the RBA highlighted the long-term risks climate change poses to the financial system, including direct physical risks to assets from climate events, and transition risks arising from policies and technologies implemented to address climate change.
