Source: Airservices Australia
Introduction
Good afternoon and thank you for the opportunity to speak at this conference. The theme – banking and financial stability – is a topic of deep interest to the RBA given our longstanding mandate to contribute to financial stability. And I would like to say thank you to all of you, for your work in this important area and contributing to our understanding of the issues.
Today I’m going to explore two broad questions relating to financial stability.
First, why does financial stability matter and what is the RBA’s responsibility in relation to it?
Second, how does the RBA deliver on its financial stability responsibility?
Along the way, I’ll highlight some of our ongoing work in this space and the issues that are on our mind. To summarise, our overall assessment is that in this period of elevated global uncertainty, the Australian financial system is well positioned to weather most shocks. However, we cannot be complacent. The nature of risks is changing and so there is ongoing work for regulators and industry to remain prepared in this evolving environment.
Why does financial stability matter and what is the RBA’s role?
Financial stability is important because of the role that the financial system plays in the everyday life of Australians.
The financial system is made up of a range of financial institutions. It includes banks, insurers, superannuation funds and non-bank lenders. It also includes financial markets, where financial assets such as shares, bonds and foreign exchange are bought and sold. And it includes market infrastructure, such as the payments system and other systems that support the trading of financial assets.
It is important that all these elements of the financial system are working well because together they provide the financial services that Australians depend on in their everyday life. More concretely, a well-functioning financial system enables households and businesses to:
- save, borrow and invest – so that they can prepare for retirement, buy their first home, or purchase equipment to expand their businesses
- make payments – so they can move money efficiently and securely, such as when they’re tapping their card to pay for groceries, or making payments for their bills online
- insure against and manage risk – so they can protect themselves against unexpected costs, such as damage to or loss of property, or unexpected medical bills.
In other words, the financial system is vital in helping Australians get on in life and plan for the future. This means that if the financial system overall is not functioning well, it is costly for everyone.
- For example, if banks are unwilling or unable to lend money, businesses might not get the working capital they need to run their operations, households might reduce spending further than otherwise, it can become more challenging to purchase a home and economic activity can suffer. Indeed, financial crises lead to economic hardship for many with long-lasting consequences for economic growth.
- Another example is disruptions to payments systems, which can prevent salaries and pensions from being paid, households from buying the things they need and transactions in financial markets from settling, causing widespread difficulties.
Maintaining financial stability is about ensuring we have a financial system that is strong, operationally resilient and prepared for adverse conditions, so we can avoid these types of disruptions and their broader costs. This doesn’t mean reducing risk to the point that we compromise innovation, competition and efficiency. But it does mean ensuring resilience alongside these other features. Indeed, innovation and competition can lead to better ways to achieve resilience. We need a financial system that can support the economy by reliably providing the financial services that households and businesses depend on, both in good times and bad. A stable financial system promotes saving and investment, supporting lower funding costs, productive investment and thus longer term growth. So financial stability is a necessary underpinning to support the economic prosperity and welfare of Australians – which is the RBA’s overarching legislative objective.
Given the alignment between financial stability and the RBA’s other functions and objectives, the RBA – like other central banks – has long had a mandate to contribute to financial stability. This is a role that has evolved and changed over time. Initially it spanned all the way from liquidity provision to banking supervision. But in the late 1990s, this changed following the Financial System Inquiry (Wallis Review). Responsibility for banking supervision was transferred to a new separate agency – the Australian Prudential Regulation Authority (APRA), which was set up to bring the prudential functions of the RBA and Insurance and Superannuation Commission together into a dedicated agency. So unlike in some other countries, in Australia, the RBA, as the central bank, is not responsible for prudential supervision of these entities – that is APRA’s job.
Although the Australian Government’s response to the Wallis Review meant that supervision of these individual financial institutions was transferred to APRA, the RBA still retained a general (albeit non-legislated) responsibility to safeguard stability of the financial system as a whole. This reflects that the RBA, as the central bank, is well positioned to both assess financial system stability – given the breadth of our system-wide responsibilities – and to support financial system stability – given our balance sheet capacity to provide liquidity. We also cannot achieve our monetary policy objectives without financial stability. Relatedly, following the Wallis Review the RBA also gained enhanced powers to regulate the payments system to ensure it is secure, stable and efficient. The RBA’s responsibility to promote the stability of the Australian financial system was recognised by the Government at that time, and in subsequent agreements between the RBA and Treasury.
More recently, following the independent Review of the RBA in 2023, the RBA’s financial stability role was enshrined in legislation – making ‘contributing to financial stability’ a core part of the RBA’s legislative functions. The Review highlighted the importance of this for reinforcing accountabilities and strengthening the foundation of cooperation arrangements with other agencies that share a mandate for promoting financial stability.
How does the RBA deliver on its financial stability responsibility?
So how does the RBA deliver on this high-level responsibility to contribute to the stability of the Australian financial system? The answer is in a number of ways, and in conjunction with other agencies.
In Australia, delivering on financial stability is a team effort. Responsibilities are shared across several agencies, each with complementary mandates and policy tools (Figure 1).
As the central bank, the RBA has a range of responsibilities which I’ll cover in more detail shortly.
As I’ve already mentioned, APRA is the prudential regulation authority, responsible for regulating and supervising banks, insurers and superannuation funds, so that Australians’ financial interests are protected and the financial system is stable, competitive and efficient. This includes responsibility for macroprudential policy and bank resolution.
The Australian Securities and Investments Commission (ASIC) and the Treasury also have important financial stability roles. ASIC is responsible for market integrity and consumer protection across the financial services sector, and regulates clearing and settlement facilities (complementing the RBA’s supervision of those same facilities from a financial stability perspective). And the Treasury has an important role in advising the government on financial stability, including the financial regulatory framework. Treasury also has important policy tools that can help alleviate the economic impacts of financial crises.
These institutional arrangements and mix of responsibilities make cross-agency collaboration essential in Australia’s financial regulatory framework. And this is where the Council of Financial Regulators (CFR) comes in.
The role of the CFR
The CFR plays a crucial role in bringing together the RBA, APRA, ASIC and Treasury to coordinate and collaborate on financial stability issues. Its ultimate aim is to promote the stability of the Australian financial system and support effective and efficient regulation.
The CFR agencies work together to promote financial stability in three key ways:
- We analyse vulnerabilities in the financial system that could amplify shocks, and work together to understand their potential impacts and coordinate policy and other actions to address them.
- We support coordination of financial regulation, so that it is effective, efficient and promotes competition in the financial sector.
- We maintain crisis readiness so the CFR agencies are as ready as can be to work together to respond to support financial stability in the event of future shocks.
Earlier this month, the CFR published its first annual update on its initiatives to address risks and vulnerabilities in the financial system – covering progress over 2025 and focus areas for the year ahead. These focus areas for 2026 are geopolitical vulnerabilities, operational vulnerabilities, systemic liquidity risk and high household leverage. Given the international environment of elevated uncertainty and geopolitical tensions, strengthening crisis readiness is a common theme running through much of this work.
While the CFR does not have formal regulatory or decision-making powers separate from those of its individual members, it has a strong track record of effective collaboration – including in response to the COVID-19 pandemic and the global financial crisis. The RBA Review in 2023 highlighted the importance of reinforcing cooperation arrangements among the CFR agencies for promoting financial stability. Consistent with this, the CFR Charter and Memorandums of Understanding between the agencies were updated earlier this year to clarify roles and responsibilities, and how agencies work together to promote financial stability.
Having talked about the CFR and its agencies, let me now turn to the specifics of the RBA’s role and how exactly we fulfil our financial stability responsibilities.
The RBA’s contribution to financial stability
The RBA contributes to financial stability in several distinct ways. Some contributions aim to be preventative – focused on promoting resilience and mitigating vulnerabilities, so that the financial system can withstand a wide range of adverse conditions. Others are curative – designed to contain disruptions and restore confidence during periods of financial stress. We’ve recently set out the RBA’s framework for contributing to financial stability on our website as part of our broader commitment to enhance transparency and public understanding of the work we do. I’ll now step through the elements of this framework (see below).
Monetary policy
Arguably the most fundamental way the RBA supports financial stability is by setting monetary policy to achieve low and stable inflation and full employment. To see why, let’s consider the alternative. For example, unemployment is the most common reason why households are unable to repay debt owed to banks, which can lead to loan losses for banks. High inflation can also trigger financial difficulties for households and businesses by leading to higher interest rates and lower real incomes, in turn affecting their ability to service loans. If a sufficiently large number of borrowers were to fall into negative equity and default on their loans, lenders could face widespread losses as a result. If these losses were large enough, this could lead to lenders sharply restricting the supply of credit to even very sound borrowers. This could disrupt economic activity and add to unemployment. And if households and businesses become concerned that their deposits at banks might not be safe, financial system stability and economic activity will be disrupted further still. So by setting monetary policy to achieve our objectives of low inflation and full employment, the RBA has a key role to play in helping create the economic conditions that support stability in the financial system.
Likewise, a stable financial system supports us to achieve low inflation and full employment. Well-functioning financial markets and institutions are essential for the transmission of monetary policy, and history has shown that episodes of financial instability can have lasting impacts on the economy and employment.
Working with the CFR agencies
As I’ve already discussed, the RBA also works closely with the other CFR agencies to support financial stability. As part of this, the RBA advises the other CFR agencies on the outlook for financial stability, including if monetary policy might affect – or be affected by – financial stability concerns.
As noted earlier, monetary policy and financial stability objectives are generally complementary, and indeed necessary for each other in the longer term. However, there can be times when monetary policy actions needed to deliver price stability and full employment may not align perfectly with financial stability goals. For example, an extended period of accommodative monetary policy required to lift employment and inflation to their appropriate levels could potentially contribute to the build-up of leverage and imprudent risk-taking in parts of the financial system. A tightening in monetary policy to control inflation at a later point could then expose these vulnerabilities.
As part of managing these interactions, the Monetary Policy Board has committed to ensuring the CFR is informed when there are material interactions between financial stability and monetary policy. This is important to support coordination of policies to address financial stability risks across the CFR, including the use of APRA’s macroprudential policy tools. In this context, the RBA and APRA have recognised that APRA’s macroprudential policy, as a financial stability tool, is better placed in most circumstances to address the build-up of certain systemic vulnerabilities than monetary policy.
The RBA now provides financial stability advice to the CFR and APRA on a regular basis, and at least annually to accompany APRA’s update to the CFR on macroprudential policy, most recently at the September 2025 CFR meeting. In that context, the RBA noted that housing credit growth has picked up, driven by strong growth in lending to investors, as borrowers have responded to lower interest rates. However, lending standards have remained sound and riskier forms of lending – such as high-loan-to-valuation-ratio (LVR) loans, high-debt-to-income (DTI) loans and interest-only loans – have edged up only slightly (Graph 1).
Graph 1
Looking forward, however, vulnerabilities could build if households begin to take on excessive debt. One way this could play out is if there was a sharp rise of investor activity from already elevated levels that results in rapid and unsustainable increases in housing prices, leverage and/or an easing in lending standards as other borrowers try to keep up.
The CFR has been discussing the importance of taking pro-active steps to prevent vulnerabilities building in the financial system over time. In this context, the CFR supported APRA’s recent decision to activate a new macroprudential policy tool – limits on high DTI lending – to pre-emptively contain the build-up of housing-related vulnerabilities in the financial system. These limits are not currently binding but would become so if high DTI lending were to pick up materially from here.
Managing monetary policy and financial stability interactions
Of course, macroprudential policy and other financial stability tools are not always going to be the answer, or at least not the whole answer. There may be circumstances where they cannot fully address financial stability concerns, either because of the nature of the financial vulnerability or because the relevant financial stability tools are not available or used. Where that has implications for the achievement of the RBA’s inflation and employment objectives, the Monetary Policy Board has flexibility in its framework to account for those concerns.
This could include circumstances where financial system vulnerabilities are assessed to be accumulating over time, resulting in a trade-off between the RBA’s ability to meet its monetary policy objectives at different time horizons. For example, holding interest rates low might, in certain circumstances, be needed to ensure the RBA achieves its inflation and employment objectives in the short-to-medium term, but in doing so result in an accumulation of vulnerabilities that pose a risk to longer term inflation and employment outcomes. As I mentioned earlier, macroprudential tools are often most appropriate in such circumstances. But if that proved unworkable or ineffective, the Monetary Policy Board might need to consider setting monetary policy so as to return inflation to target over a slightly longer timeframe than it otherwise would if there were no financial stability concerns. The Board’s actual decision would, of course, depend on the specifics of the situation and their assessment of the risks. But as highlighted in the RBA Review, transparency about decision-making is important. In any circumstance where financial stability considerations have had a bearing on the monetary policy decision, the Monetary Policy Board will clearly communicate how its decisions remained consistent with achieving its monetary policy objectives. That includes explaining:
- how and why it might use the flexibility in its monetary policy framework to take account of financial stability considerations relevant to the outlook for inflation and employment
- how it had assessed any trade-offs in its ability to achieve its monetary policy objectives in the short vs medium term
- why financial stability policies may not be sufficient to fully address the financial stability concerns.
To be clear, none of these considerations are bearing on monetary policy at the moment. Given the resilience in the Australian financial system, the Monetary Policy Board recently observed that there are no immediate implications for monetary policy arising from domestic financial stability considerations.
Communicating regular financial stability assessments
Each of the contributions to financial stability I have mentioned so far are underpinned by the RBA’s ongoing monitoring and assessment of financial stability. Our own research and analysis is complemented by insights from others in Australia and abroad, importantly including liaison with Australian financial institutions, businesses and community services organisations, as well as the other CFR agencies.
We publish a comprehensive financial stability assessment twice yearly in the RBA’s Financial Stability Review. This includes where we see potential risks to financial stability and vulnerabilities in the financial system, given the prevailing domestic and international environment. To make this assessment, we also consider the resilience of households, businesses, banks and non-bank financial institutions in the face of potential shocks.
By making sure there is good information about where the risks and vulnerabilities lie in our financial system, we can support good decision-making by individuals, businesses and policy-makers to address and manage these threats, and to limit excessive risk-taking. This is another way the RBA contributes to financial stability.
The RBA published its most recent Financial Stability Review in October (see below). A key takeaway was that the heightened risk in the international environment means a systemic risk is most likely to come from abroad. However, our judgement is that Australian households, businesses and banks are well placed to weather most shocks. This is thanks to ongoing strength in the labour market, prudent lending standards and high levels of bank capital and liquidity.
Financial Stability Review, October 2025
The Australian financial system is well placed to withstand most shocks but continued effort is needed to stay prepared for emerging challenges
However, this is certainly not an environment we want to become complacent in. There are two key issues here we called out in the Review.
First, it is important that lending standards remain sound so that the good level of financial resilience among households and businesses is not undermined over time. APRA’s pre-emptive introduction of high DTI lending limits will help in this regard.
Second, it is important that financial institutions continue to build their resilience to geopolitical and operational risks. These threats are intensifying, and we are alert to the prospect that financial and operational stress events occur at the same time. We got some sense of the potential challenges here in April this year, when cyber-attacks on the Australian superannuation sector coincided with stressed conditions in financial markets. There is, accordingly, a big program of work underway across the CFR agencies, government and industry to strengthen resilience both of individual institutions and the financial system as a whole.
So the upshot of all that is while the Australian financial system is starting from a good place, there is work to do to keep up with the evolving environment.
Crisis management, liquidity provision and financial market intervention
Having discussed the things the RBA does to support financial stability in advance, let me now turn to what we stand ready to do in the event a shock does occur. This includes our responsibilities in crisis management (in coordination with the CFR) and through our role as the ultimate provider of liquidity to the financial system.
The RBA works with the CFR agencies to maintain crisis management readiness and ensure effective responses to a range of potential or actual instances of financial instability. These may include material stresses in financial institutions, disruptions in financial markets, interruptions to the smooth functioning of financial market infrastructure, or major operational disruptions affecting the provision of financial services.
Each CFR agency has a range of responsibilities that collectively contribute to the CFR’s crisis management arrangements. Fortunately, Australia has not had to contend with the failure of a key financial institution for many years. But to remain prepared, the CFR conducts regular crisis exercises and simulations – including joint exercises with the New Zealand financial authorities (through the Trans-Tasman Council on Banking Supervision). And we have, of course, had real life practice at responding to various shocks to the financial system, such as the COVID-19 pandemic, all of which our financial system has managed to weather.
In a crisis situation the RBA has a number of responsibilities. First, the RBA has lead responsibility among the CFR agencies for monitoring systemic risk (including in financial markets, clearing and settlement systems, and the payments system).
The RBA is also responsible for adjusting the supply of liquidity to institutions or markets as appropriate.
In exceptionally rare circumstances, this could include providing liquidity assistance to a bank or clearing and settlement facility that is solvent but facing acute liquidity pressures. To provide such ‘exceptional liquidity assistance’, the Monetary Policy Board would need to be satisfied that to do so was needed to contribute to the stability of the Australian financial system, in line with its legislative responsibilities.
In rare instances of market-wide liquidity stress, the RBA may also determine it is appropriate to provide liquidity support to eligible counterparties more broadly. This is the approach the RBA adopted in response to the disruptions following the outbreak of the pandemic in March 2020, when we adjusted the size and frequency of our repurchase operations and broadened the range of accepted collateral to support financial stability.
I should also note here that the RBA’s provision of liquidity in normal times is also an important contributor to maintaining financial stability. This occurs through the RBA’s standard liquidity facilities as part of implementing monetary policy and ensuring banks have enough cash (or liquidity) to meet their day-to-day obligations.
As well as ensuring adequate liquidity is provided to the financial system, in rare circumstances the RBA may also intervene in the markets for foreign exchange or bonds issued by Australian governments to address dysfunction in these markets where that dysfunction threatens broader financial stability. We can do this by temporarily buying and selling certain assets when markets are displaying signs of substantial illiquidity or there are very sharp changes in prices that do not appear to be explained by economic news or other market forces.
For example, during the period of exceptional instability at the onset of the pandemic, the RBA purchased Australian Government bonds and semi-government securities for this purpose. This helped restore market functioning, bringing bid-offer spreads back down to more normal levels (Graph 2). Effective functioning of the government bond market is important for financial stability because it is a key market that provides the pricing benchmark for many financial assets.
Graph 2
Finally, the RBA, in coordination with ASIC, is also responsible for the supervisory response to financial stress at clearing and settlement facilities and for the resolution of these facilities if required. This broadly mirrors the recovery and resolution role that APRA has for banks, insurers and superannuation funds.
Broader contributions to financial stability
While that gives you a flavour of how the RBA contributes to financial stability, the list is not exhaustive. The RBA engages with the CFR on a wide range of financial stability topics beyond those relevant to monetary and macroprudential policy. We are an active participant in international forums that support global and regional financial stability and promote effective standards and cooperation. And we play an important role in regulating and supervising the payments system – to ensure it is safe, competitive and efficient – and in managing Australia’s high-value payment system (the Reserve Bank Information and Transfer System or RITS).
Conclusion
In conclusion, financial stability matters. It ensures the financial system can reliably provide the financial services that Australians depend on through good times and bad. This is a critical foundation for Australia’s economic prosperity and welfare.
The RBA has long had a financial stability role, and we welcome that this now has a clear statutory basis following recent amendments to the Reserve Bank Act 1959. Delivering on this mandate involves a range of activities. The RBA contributes through its monetary policy, liquidity provision, payments system and financial market infrastructure oversight and public communication of where risks may lie or vulnerabilities may be building.
Equally important is our work with others. Collaboration across Australia’s financial regulators has always been central to maintaining financial stability. Through the CFR we have a strong track record of effective cooperation. Recent steps strengthen this collaboration further, by enhancing clarity of individual agencies’ responsibilities, the CFR’s collective objectives, and setting out clear and specific commitments for how the agencies will work together to promote financial stability.
While the Australian financial system is well positioned to weather most shocks, working together effectively is key to ensuring we remain prepared for any challenges ahead.
Thank you and I look forward to your questions.