RBA’s Financial Stability Review: Financial system was in a strong position heading into virus impacts, faces increased risks

The Reserve Bank of Australia (FSR) is out with its semi-annual Financial Stability Review (FSR) on Thursday, citing that the financial system was in a strong starting position heading into the virus impacts and faces increased risks.

Additional points

Regulatory authorities have been working closely together to minimize the economic harm caused by the pandemic.

The exceptional measures taken to contain covid-19 are having a major effect on economic activity and the global financial system.

Australian financial system enters this challenging period in a strong starting position.

Financial market uncertainty is elevated.

Capital levels are high and the banks' liquidity position has improved considerably over recent times.

Heightened uncertainty related to the pandemic is compounding the usual volatility in financial markets.

Banks have limited need to issue debt in the period immediately ahead.

Banks also enter the downturn with high profitability and very good asset performance.

The COVID-19 pandemic is putting the spotlight on a number of pre-existing global financial vulnerabilities.

Economic downturn, uncertainty and social distancing are likely to result in very little turnover in the housing market.

Remains unclear how this will affect residential property prices.

With many staff working from home and from different locations, financial institutions face increased operational risks and may have less capacity to take on and manage market risk.

Pandemic has changed the nature of some it and cyber risks.

Australian businesses generally have low levels of gearing and most have significant liquid assets.

In the period ahead, many households will find their finances under strain due to efforts to contain the virus.

More generally, tightened lending standards over the past five years or so have improved the quality of outstanding household debt.

With many staff working from home, financial institutions face increased operational risks.

Financial institutions may have less capacity to take on and manage market risk.

About RBA Financial Stability Review

The Financial Stability Review provides the Bank's assessment of the current condition of the financial system and potential risks to financial stability. It is issued half-yearly.

AUD/USD reaction

Australian dollar ran through fresh offers on the RBA’s FSR, as it highlighted the elevated risks to the economy due to the coronavirus outbreak. The Aussie eroded another 15-pips on the statement release, extending its retreat from daily highs of 0.6251.

At the time of writing, AUD/USD drops 0.25% to print daily lows of 0.6210.