The central bank has warned that the greatest risk to Australia’s financial stability over the next few years will be the banks’ large exposure to potentially deteriorating home loans.
In its Corporate Plan for 2018–19, released on Friday, the Reserve Bank outlined its role in fostering overall financial stability in Australia.
“During 2018–19 to 2021–22, the main risks to financial stability will most likely continue to relate to credit quality,” the RBA said.
“Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue, requiring ongoing monitoring by both banks and regulators.”
The RBA has made repeated warnings about Australia's high levels of household indebtedness, which has considerable implications for monetary policy decisions.
“Over 2018–19 to 2021–22, the structure of the Australian economy will continue to evolve and economic shocks – which, by definition, are not forecastable – will occur,” it said.
“Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets. The high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks.”
The RBA also flagged operational risks, especially the potential for a disruptive cyber-attack on financial institutions or infrastructures, which are expected to be a focus of financial institutions and their regulators over coming years.
The Reserve Bank works with other regulatory bodies in Australia to foster financial stability. RBA governor Philip Lowe chairs the Council of Financial Regulators (CFR) – comprising the Reserve Bank, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury – whose role is to contribute to the efficiency and effectiveness of regulation and the stability of the financial system.
In the period ahead, the RBA’s work with other CFR agencies will be informed by the Financial Sector Assessment Program review of Australia being conducted by the International Monetary Fund during 2018.
“The bank and other CFR agencies will also carefully consider the implications for the resilience of the financial sector arising from findings and recommendations of the final report of the Productivity Commission’s review of competition in the financial system, as well as the outcomes of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry,” the bank said.
“The bank will also continue working with APRA and with other regulators to monitor and, where necessary, respond to risks that may emerge from economic and financial shocks emanating from Australia or abroad.”
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