A rising number of households on the cusp of financial stress, but Reserve Bank says banking system isn't at risk

Australian homes and businesses are vulnerable to financial stability risks as rising inflation and interest rates continue to pressure the global economy.

Here's my report just after I left the lockup at Martin Place in Sydney

The latest Financial Stability Review released today by the Reserve Bank warns any shock to global growth could result in lower incomes, higher unemployment and “challenge the debt-servicing capacity of more vulnerable borrowers” in Australia.

 

My report for ABC News Online

The review singles out China as a major risk where stress in the ailing property sector and other imbalances could spread to the rest of the Chinese economy and “reverberate globally”.

 

Other potential flashpoints include banking systems in the United States and Switzerland where global financial risks remain “elevated” despite intervention by governments to provide support and in the case of Credit Suisse, a forced takeover by rival UBS.

 

“Higher than anticipated loan losses resulting from rising unemployment could lead to a tightening in lending standards, amplifying the downturn,” the Review says.

 

“Inflation and interest rates remaining high for an extended period could lead to a significant deterioration in credit quality that could lead to lenders cutting back on the provision of credit.”

 

The Review warns “disorderly declines in asset prices” could disrupt the functioning of the financial system.

 

While stressing that Australia’s banks are well-positioned to absorb any shock, the Review says financial institutions could become more cautious about lending given the stresses on households struggling to meet higher mortgage repayments.

 

“In an adverse scenario where growth slows and unemployment rises more than expected, loan losses for banks would increase,” the Review says.

 

But it says high provisioning and capital levels “leaves banks well-placed to manage the increase in arrears limiting the impact on credit provision in the economy.”

 

“Systemic risks are limited due to Australian banks’ low exposure and conservative lending practices.”

 

The review says only a “very small share of borrowers” are in negative equity (where the value of a loan exceeds the value of a property) further protecting banks from credit losses.

 

While the Review says Australian households are well-placed to adapt to challenging economic conditions, it warns “some are vulnerable to further shocks”.

 

It notes most borrowers have restrained discretionary spending, reduced or drawn down savings and increases hours worked to meet repayments.

 

The Review says variable rate borrowers, who account for three-quarters of loans, have seen repayments increase between 30 per cent and 50 percent since May 22 when interest rates started rising from 0.1 percent.

 

“The vast majority of households continue to service their debts,” the Review says.

 

However, the Review does not appear to be alarmed about a feared “mortgage cliff” when fixed interest rate borrowers rollover over a higher variable interest rates world.

 

“They (fixed rate borrowers) do not appear to be at more risk than similar borrowers and in fact have benefits from having fixed their interest rates at a very low level for an extended period”.

 

Other risks to financial stability include “the increasing intensity of cyber attacks” on financial institutions, rising geopolitical tensions stemming from the war in Ukraine and effects on climate change on the global economy.

 

Global sharemarkets have been volatile in recent days on fears that interest rates in the United States will stay higher for longer given resilient inflation.

 

The Reserve Bank left interest rates steady at 4.1 percent earlier this week, but some economists think fears about inflation and rebounding real estate prices could prompt a November rate hike on Melbourne Cup Day.