Key Highlights

  • The RBA sees the Australian financial system as resilient, with banks positioned to keep lending even in a downturn.
  • Its concerns lie mainly offshore: a global bond market adjustment, low risk premia in equity and credit markets, and the build-up of AI-related debt.
  • It also flagged growing operational risks, such as outages at common service providers.

Australia's own financial system looks resilient, according to the RBA, but the minutes of its September meeting point to a set of global vulnerabilities, from thin risk premia to a build-up of AI-related debt, that it judges more material than the risks at home.

Interest rate decisions usually centre on inflation and jobs, but the Reserve Bank of Australia's Monetary Policy Board also keeps an eye on financial stability. At its 28–29 September 2026 meeting, where it lifted the cash rate target by 25 basis points to 4.60%, the Board reviewed where the biggest financial risks lie. Its answer, recorded in the minutes published on 13 October, looked well beyond Australia's borders.

According to the minutes, members judged that global risks were more material than domestic cyclical risks. Three were singled out: an adjustment in global bond markets, low risk premia in equity and credit markets, and the accumulation of AI-related debt. The minutes also noted that operational risks, including outages at common service providers, were growing.

What a thin risk premium means

A risk premium is the extra return investors demand for holding something riskier than a safe asset. Shares are expected to return more than government bonds, and lending to a company is expected to pay more than lending to a government, because there is a greater chance of loss.

When risk premia are low, investors are accepting relatively little extra compensation for taking on that risk. That can reflect genuine confidence, but it can also mean markets are pricing in a benign outlook with little margin for disappointment. If sentiment shifts, a reassessment of risk can push asset prices down sharply and quickly.

The minutes flag low risk premia in both equity and credit markets as a global concern. They do not suggest a particular trigger, and the RBA has not forecast a correction. The point is that thin buffers in asset pricing leave less room to absorb a shock.

The AI investment wave and its financing

Artificial intelligence features in the RBA's thinking in several ways. In August, Assistant Governor (Financial Markets) Christopher Kent pointed to "resilient global demand because of AI-related investment". The Board's September statement listed AI-related demand pushing up technology goods prices among the upside risks to inflation (a paraphrase of the statement).

The financial stability angle is different. The minutes identify AI-related debt accumulation as one of the global risks members judged more material than domestic cyclical ones. Large investment programmes are often financed partly with borrowing, and if the expected returns from that investment take longer to arrive or fall short, the debt taken on to fund it can become a source of strain.

The RBA's October 2026 Financial Stability Review (FSR), released on 1 October, also listed advances in artificial intelligence among the threats to the financial system, alongside geopolitical tensions, global market vulnerabilities and disruption at critical service providers.

Closer to home, the Board's statement noted that "growth in business investment and debt is strong". The minutes said June quarter GDP was a little stronger than expected, led by private business investment, which was up more than 10% over the year. Those observations relate to domestic activity rather than to the global AI-related debt risk, but they show why investment trends are on the Board's radar.

Bond markets, share prices and an orderly adjustment

Bond markets also came up at the Governor's media conference on 29 September, where Michele Bullock offered a measured assessment: "I think the bond markets are reacting in an orderly way."

Equity markets have also moved. The minutes record that Australian equities fell about 5% since the Board's previous meeting. The Australian dollar was about 5% higher since the start of the year on a trade-weighted basis, though it had depreciated slightly since the previous meeting.

None of this has yet altered the course of interest rate policy. The minutes state that "financial stability considerations were not currently constraining the setting of monetary policy." In other words, the Board does not see financial stability risks as a reason to hold back from the rate settings it judges necessary to bring inflation down. Indeed, the Board's statement argued that "a further tightening in financial conditions is warranted to support a return of inflation to target". The minutes described domestic financial conditions as having "remained somewhat restrictive", though the extent of that restriction is uncertain.

Why the domestic picture looks sturdier

The RBA's view that global risks outweigh domestic cyclical ones rests partly on the condition of Australian households and banks. The FSR found that the financial system has "a good degree of resilience", although global and operational vulnerabilities are growing. It also concluded: "Australian banks are well positioned to continue lending, even in a downturn."

The minutes add detail on borrowers:

  • Arrears are low and loan impairments are around historical lows.
  • Fewer than 2% of owner-occupier borrowers have a cash flow shortfall, well below the 2023–24 peak.
  • Very few borrowers are in negative equity, and that is likely to remain so even if housing prices fell 20%.

Scheduled mortgage payments are about 10% of household disposable income, near their 2024 peak, so pressure on households has not disappeared. The FSR noted some pockets of stress among mortgage holders and some business sectors facing tougher conditions, and said the small size of non-bank lenders keeps system-wide risks contained. It urged institutions to keep building resilience and strengthen crisis preparedness.

The bottom line

The RBA sees Australia's financial system as resilient, with banks positioned to keep lending even in a downturn. Its concerns lie mainly offshore: a global bond market adjustment, low risk premia in equity and credit markets, and the accumulation of AI-related debt, along with growing operational risks such as outages at common service providers.

For now, the Board says those considerations are not constraining monetary policy, which remains focused on inflation. The Governor described bond markets as reacting in an orderly way. The next cash rate decision is scheduled for 2.30 pm on 3 November 2026.