The Reserve Bank of Australia has said strong capital and low loan losses will give banks room to absorb financial shocks, as faster‑growing non‑banks draw closer scrutiny.
The Reserve Bank of Australia (RBA), in its March 2026 Financial Stability Review, has delivered a broadly reassuring assessment of the country’s financial system, concluding that well‑capitalised banks can keep lending through a downturn, while noting that non‑bank credit growth was being closely monitored.
Banks seen ready to withstand shocks
The review opened by stressing that the central bank viewed the overall system as robust enough to keep supporting households and businesses across a range of economic outcomes.
“The Australian financial system remains well positioned to continue providing services to Australian households and businesses in a range of scenarios, including a pick-up in inflation and/or a weakening of economic growth,” the RBA said.
“There is a good degree of financial resilience in the system, but it is important that lending standards remain strong, so this resilience is maintained.”
The RBA then turned to bank balance sheets, emphasising that asset quality had held up despite higher rates and cost‑of‑living pressures.
“Banks’ credit quality and collateralisation remains strong,” the report read.
To underline that point, the RBA noted that loan performance had only deteriorated at the margins and remained favourable compared with previous cycles.
On top of solid asset quality, the review highlighted the sector’s thick capital and liquidity buffers, saying that banks had the capacity to continue lending even if conditions turned sharply.
“If a significant economic downturn occurs, Australian banks are well positioned to absorb significant loan losses while continuing to support the economy through lending to households and businesses,” the report read.
Liquidity was also singled out as a key line of defence, particularly in an environment of geopolitical tension and more volatile funding markets.
“Banks hold large reserves of liquid assets, and it is important they can be quickly converted into cash in a liquidity stress event,” it said.
Geopolitical risks, especially the ongoing military conflict in the Middle East between the US and Israel and Iran, were meanwhile flagged as a source of indirect pressure rather than causing direct losses.
“Australian banks are unlikely to face substantial losses arising out of exposures to the Middle East as they have very limited direct exposure to the region,” the RBA said.
“Ongoing profitability could come under greater pressure if markets were to remain volatile and funding conditions tightened substantially as well as if elevated energy prices contributed to a meaningful deterioration in asset quality, but these developments would occur in the context of a banking system with a strong capital position.”
Non‑bank expansion under the microscope
The RBA devoted extensive attention to the fast-growing non‑bank sector and its evolving role in credit provision.
It observed that these lenders were increasingly important competitors, while still representing a relatively small slice of total credit.
The central bank noted that this growth had expanded funding options for both households and businesses, particularly in niches where banks were less active.
“Non-bank lenders have increased the availability of credit for both housing and business borrowers, but risks to financial stability remain contained,” the report outlined.
However, the RBA made clear that it was watching underwriting practices closely, drawing on “liaison” with market participants to gauge how far standards were being stretched.
“Liaison suggests there has been some easing in lending standards by non-bank lenders, but to date this appears to have been modest,” it said.
Resilience with a higher risk backdrop
Stepping back, the central bank linked its assessment of strong domestic buffers to a global environment it described as more fragile and unpredictable.
It stressed that while the system was in good shape, the potential for both financial and non‑financial shocks had increased.
“At the same time, the global risk environment has deteriorated and remains challenging, with the potential for both financial and non-financial shocks to affect Australia,” it stated.
“Enhancing operational resilience and crisis preparedness therefore remains a priority given the complexity of the operating environment.”
The RBA also said that the starting point for the household sector was sturdy, with the central bank stating that most mortgagors still carried buffers that would allow them to endure rising rates and tougher economic conditions.
[Related: RBA says households can shoulder higher rates]
