Australia’s financial system remains resilient, but mounting global risks from high sovereign debt, stretched asset valuations, artificial intelligence investment and cyber threats are increasing the potential for a disruptive financial shock, according to the Reserve Bank of Australia.
In its October 2026 Financial Stability Review, released today, the RBA said most Australian households, businesses and banks remain well placed to withstand weaker economic conditions, including a material downturn or sharp fall in housing prices.
However, the central bank warned that the biggest threats to financial stability are increasingly coming from overseas.
High government debt, elevated asset prices and growing leverage have left global financial markets more vulnerable to a sudden repricing, while geopolitical tensions and rapid technological change are adding further uncertainty.
Households remain resilient
The RBA said most Australian mortgage holders remain in a strong enough financial position to manage tougher conditions.
The substantial rise in house prices since the pandemic means most borrowers retain positive equity in their homes, while many households have accumulated savings through offset and redraw accounts.
That provides an important buffer against higher borrowing costs following the RBA’s latest decision to lift the cash rate to 4.60%.
The central bank nevertheless acknowledged that conditions remain difficult for some households, particularly those carrying large debts or facing higher essential living costs.
Businesses are also generally considered resilient, although some industries continue to face pressure from elevated operating expenses and softer demand.
AI boom creates new financial risks
The RBA highlighted artificial intelligence as an emerging source of both opportunity and financial risk.
Optimism surrounding AI has boosted asset prices and could ultimately lift productivity, but the rapid investment boom has also increased financial leverage and complexity.
The central bank said the growing use of long-term debt to fund AI infrastructure is becoming less transparent, increasing vulnerability if expected profits fail to materialise.
A sharp reassessment of AI valuations could therefore reverberate through equity, debt and private credit markets.
AI is also increasing operational risks by making the cyber-security environment more complex.
Global market shock could hit Australia
The RBA warned that Australia would not be immune to a major overseas disruption.
A disorderly sell-off in global bond or equity markets could raise funding costs for Australian institutions, reduce access to international capital and cause losses across household and superannuation portfolios.
The warning is particularly timely after the recent surge in global bond yields, with US government borrowing costs reaching their highest levels in almost two decades.
Geopolitical shocks could also interact with already-stretched financial markets, while a major cyberattack affecting critical infrastructure could quickly become a system-wide financial stability issue if payments or other essential services were disrupted.
Banks well positioned
Despite those risks, Australian banks remain well capitalised and capable of continuing to lend during a significant downturn, according to the RBA.
Risks from non-bank lenders also remain relatively contained.
The central bank said maintaining that resilience would require financial institutions to keep improving contingency planning and crisis-response capabilities as financial, geopolitical and operational risks become increasingly interconnected.
The overall message from the October review is therefore one of domestic strength but growing external vulnerability: Australia’s financial system remains sound, but the international environment surrounding it is becoming considerably more fragile.
