The Reserve Bank's October Financial Stability Review puts bank loss provisions at about 0.7 per cent of total credit, one layer in a set of defences that also includes collateral and capital.

Banks do not wait for borrowers to default before preparing for it. They set aside provisions, an accounting buffer recognising losses they expect may arise on their loan books. According to the Reserve Bank of Australia's (RBA) October 2026 Financial Stability Review, released on 1 October, those provisions are about 0.7 per cent of total credit.

That figure lands at a delicate moment. The RBA's Monetary Policy Board raised the cash rate target to 4.60 per cent on 29 September, its fourth increase of 2026 and a cumulative 100 basis points of tightening for the year. Governor Michele Bullock acknowledged the cost to borrowers plainly: "Those who have mortgages, yes, this clearly impacts them and it hurts them."

So how prepared are lenders if some of that pain turns into missed repayments? The review's answer comes in layers.

Three layers of defence

Layer one: provisions

A provision of around 0.7 per cent of total credit means that, for every $100 of credit outstanding, banks have set aside roughly 70 cents against expected losses. On its own, that figure says little about whether it is adequate; its significance depends on how much of the loan book could actually go bad, and how much lenders could recover when it does.

The material cited here does not say how the 0.7 per cent compares with earlier years, or how it is split between households and businesses. What it does do is sit alongside two other buffers that the review examined in detail.

Layer two: security behind problem loans

When a loan becomes non-performing, the question becomes what the lender can recover. Here the review's figures, as at June 2026, are striking:

  • Over 90 per cent of housing non-performing loans were well secured.
  • Over 50 per cent of business non-performing loans were well secured.

The difference between those two numbers is instructive. Home loans are backed by residential property, and even after recent falls, housing prices are, in Bullock's words to a parliamentary committee on 18 September, about 50 per cent higher than in early 2020. Negative equity is currently below 1 per cent of borrowers, according to the review. The material cited here does not explain why a smaller share of business problem loans is well secured.

Layer three: capital

Beyond provisions sits capital. Banks' Common Equity Tier 1 (CET1) capital ratio was 12.4 per cent in June 2026. In the review's stress test, with housing and commercial property prices down 20 per cent, unemployment at 6.3 per cent and the cash rate at 5.6 per cent, the ratio fell to around 11.6 per cent, and banks could absorb losses while continuing to extend credit.

Provisions cover losses lenders expect; capital is there for losses beyond those expectations. Together they form the system's shock absorbers.

Where tougher times could bite

The review and recent RBA data point to the parts of the loan book worth watching.

Businesses. Company insolvencies are "around their longer-run average", the review said, but elevated in hospitality and construction. In construction, it pointed in part to the "typically thin margins of some businesses". Assistant Governor (Economic) Sarah Hunter noted on 14 September that construction has higher business closure rates, though she said there were no signs of systemic stress.

At the same time, business lending is growing fast. The RBA's Financial Aggregates for August 2026 showed business credit up 0.9 per cent in the month and 10.9 per cent over the year, well ahead of housing credit at 7.3 per cent and total credit at 8.4 per cent. The Board's September statement described business investment and debt growth as strong.

Households. The share of variable-rate owner-occupiers with a cash-flow shortfall "remains relatively low at around 2 per cent", and most of those have savings to cover it for at least six months. Severe stress, the review said, "will remain well below its 2024 peak". Still, Assistant Governor (Financial Markets) Christopher Kent noted in August that "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income."

Private credit. Private credit accounts for about 10 per cent of total business debt but less than 2 per cent of financial system assets. Banks' drawn exposures to private credit funds have an upper limit of 2.8 per cent of bank assets, and the actual figure is likely much smaller. The review noted that some private credit funds have had to enforce redemption limits.

Not just credit risk

Provisions address one kind of loss: borrowers who cannot repay. The review was explicit that other threats are building. Its media release described "a good degree of resilience, but global and operational vulnerabilities continue to mount", naming geopolitical tensions, global financial market vulnerabilities, advances in AI and disruptions at critical service providers. It warned that "Cyber-attacks have the potential to cause disruptions at a systemic level". Those risks are not the kind a loan-loss provision is built to absorb.

The macroeconomic backdrop also matters. Headline CPI inflation was 4.0 per cent over the year to August, with underlying inflation, in Bullock's words, "about 3.5 per cent for the past six months". Unemployment has risen to 4.6 per cent, though Bullock said a recession is "not our central base case at this moment". The Board's next decision is at 2.30 pm on 3 November, and Bullock has said she will not give forward guidance.

The bottom line

Loss provisions of about 0.7 per cent of total credit are the first line of defence in a layered system. Behind them sit well-secured problem loans, especially in housing, and a CET1 capital ratio that the review's stress test suggests could absorb a severe downturn while banks keep lending. The pressure points identified by the RBA are specific rather than system-wide: hospitality and construction businesses, a fast-growing business loan book, and a private credit sector that is small relative to the system but showing some strain.