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The Reserve Bank's October Financial Stability Review gave Australia's banks a vote of confidence, judging that they could keep credit flowing to households and businesses even if the economy turned down.

Of all the judgements in the Reserve Bank of Australia's (RBA) October 2026 Financial Stability Review (FSR), one sentence about the banking system may carry the most weight for the wider economy: "Australian banks are well positioned to continue lending, even in a downturn".

The Review was released at 11.30 am on 1 October, two days after the RBA's Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60 per cent. Its overall assessment was that "Australia's financial system has a good degree of resilience, but global and operational vulnerabilities continue to mount". The banking finding sits at the centre of the first half of that sentence.

Why 'continue lending' is the key phrase

A financial stability review is not mainly concerned with whether banks are profitable in good times. The more important question is how they behave when conditions deteriorate.

If lenders pull back sharply during a downturn, households and businesses that need credit to bridge a difficult period can find it harder to obtain. That can turn a slowdown into something deeper. A banking system that can keep lending through a downturn helps to absorb a shock rather than amplify it.

By choosing the words "even in a downturn", the RBA is addressing exactly that scenario. It is saying that the banks are not just sound today, but placed to keep supporting the economy if the outlook worsens.

What the banks are lending into

The strength of a bank depends heavily on the health of its borrowers. Here the FSR's findings on households and businesses provide important support for its verdict on lenders.

On households, the Review concluded that "Most Australian households with mortgages remain well placed to manage more difficult conditions". The supporting detail includes:

  • a cash-flow shortfall share among variable-rate owner-occupier borrowers that "remains relatively low at around 2 per cent";
  • offset and redraw buffers leaving "the median borrower able to cover over a year of scheduled mortgage payments at current interest rates";
  • "less than 1 per cent of borrowers" owing more than their property is worth;
  • 90-day-plus arrears that increased a little over the year to date but remain around pre-pandemic levels.

The RBA also ran a severe scenario in which the "unemployment rate increases to 6.3 per cent, inflation increases to 7 per cent, and the cash rate rises to 5.6 per cent". It estimated the share of mortgagors at higher risk of default would rise to around 5 per cent, only a little higher than the 2023 peak.

On new lending standards, the Review found that "The aggregate share of new high DTI lending remains well below APRA's recently implemented limits of 20 per cent". Housing credit growth has eased recently, particularly for investors.

On businesses, the RBA said "Most businesses should be able to manage elevated cost pressures, although conditions are more challenging in some sectors". It found that "Total company insolvencies as a share of operating companies declined over the past year and are around their longer-run average", though stress remains elevated in hospitality, construction and transport. It also expects the administration of one major builder to cause a temporary spike in insolvencies in the September quarter.

Commercial property also looked steady. Non-performing commercial real estate loans remain low, and the Review found little evidence of stress among owners of Australian commercial real estate.

Demand for business credit is also firm. The Board's September statement noted: "Growth in business investment and debt is strong."

Where the risks lie

The RBA's confidence in the banks does not mean it sees no threats. The vulnerabilities it highlighted are mostly global or operational rather than rooted in domestic loan books.

The Review pointed to "elevated threats from ongoing geopolitical tensions, growing vulnerabilities in global financial markets", as well as "advances in artificial intelligence and critical service provider disruptions". The last two are a reminder that a bank's resilience is not only about capital and loan quality – it also depends on its systems and the services it relies on.

In the global chapter, the RBA noted that "Risk premia in global equity and credit markets remain low by historical standards", and that "Hedge fund leverage is near record highs, with total repo borrowing by US hedge funds over US$3 trillion". Private credit funds have used redemption limits, or "gates", which the RBA said "have so far helped to contain liquidity pressures and the need for forced asset sales". Energy prices also rose sharply again in September in response to Middle East developments. Closer to home, the RBA found that "Australia has little direct exposure to China's financial system".

Outside the banks, the RBA judged that "system-wide risks to stability posed by non-bank lenders remain contained by their relatively small size".

Reading the verdict alongside rate policy

The FSR's assessment arrives as monetary policy is tightening. Governor Michele Bullock said at her 29 September media conference: "I know this decision is difficult for households with a mortgage and businesses with loans." She also noted that "it can take 12, perhaps even 18 months" for the full effect of rate changes to flow through.

Asked about recession, Bullock said: "That is not our central base case at this moment." The FSR's banking conclusion, though, is framed to hold even if conditions are tougher than the central case.

The bottom line

The October FSR found that "Australian banks are well positioned to continue lending, even in a downturn". That judgement rests on resilient household borrowers, business insolvencies around their longer-run average, low stress in commercial property, and new high-DTI lending well below APRA's limits.

The main risks the RBA flagged are global and operational, from geopolitical tensions and leveraged global markets to AI and critical service providers. What to watch: the Board's next decision and updated forecasts at 2.30 pm AEDT on 3 November, and the September-quarter insolvency figures as the effect of the major builder's administration comes through.