Investments

16 October 2026

By Damon Frith, Wealth Editor, NAB Private Wealth

For more than two decades, discussions about Australian financial stability have revolved around a familiar first pillar of risk: housing prices, household debt, bank balance sheets and credit quality. Geopolitical risk has always been a consideration but has required greater consideration in recent years. In the Reserve Bank of Australia's latest Financial Stability Review a third pillar has emerged as another consideration for policymakers, as technology, cyber threats, artificial intelligence and concentration in critical digital infrastructure create new channels through which disruption could spread.

The RBA's central message is that Australia's financial system remains resilient, but the sources of future instability are becoming less traditional, more complex and increasingly global. Rather than focusing primarily on the risk of a domestic credit boom or banking crisis, the RBA is paying close attention to how the three pillars could interact with financial markets in ways that are difficult to predict.

The concern is about interconnectedness

The modern financial system depends on a web of banks, markets, technology providers, payment systems, cloud infrastructure and financial market operators. That interconnectedness creates efficiencies, but it also means disruptions can spread more quickly than previously. A shock that begins in one market, technology platform or critical service provider has the potential to cascade through multiple parts of the financial system.

The RBA argues that the likelihood of such events may be rising. Heightened geopolitical tensions, persistent cyber threats and rapid technological change are creating new vulnerabilities at a time when financial systems are becoming more complex. The result is an environment where financial and non-financial risks increasingly overlap.

Why operational resilience matters

One of the most striking themes in the review is the prominence given to operational risk.

Historically, central banks focused heavily on financial risks such as excessive leverage, poor lending standards and inadequate capital buffers. Those concerns remain important, but the RBA now devotes an entire section to operational resilience, reflecting concerns that disruptions to critical infrastructure could become a source of systemic stress.

This includes cyber attacks, technology failures and outages affecting crucial financial infrastructure such as payment systems, settlement systems and market operators. The RBA notes that financial institutions are increasingly reliant on common service providers, including cloud computing and technology platforms. While these arrangements can improve efficiency, they also create concentration risks. If a critical provider experiences a prolonged disruption, multiple institutions could be affected simultaneously.

In the RBA's assessment, operational resilience is becoming as important as capital resilience. The ability of financial institutions and market infrastructure to continue operating during periods of disruption may be just as critical as their capacity to absorb financial losses.

The AI boom is creating new vulnerabilities

Another recurring theme is artificial intelligence.

The RBA is not arguing that AI represents a threat in itself. In fact, the report acknowledges AI's potential to improve productivity, enhance operational efficiency and strengthen cyber defence capabilities.

However, the central bank is increasingly focused on how the AI investment boom is being financed and what could happen if expectations prove overly optimistic.

The review highlights the rapid increase in AI-related capital expenditure, much of which is now being funded through debt markets rather than equity. It also points to increasingly complex financing structures involving public debt markets, private credit, special-purpose vehicles and various forms of off-balance-sheet financing. Some arrangements involve what the RBA describes as circular financing structures, where participants within the AI ecosystem simultaneously fund and depend on each other.

That does not mean a crisis is imminent. Rather, the RBA's concern is that markets may be becoming increasingly exposed to assumptions about future AI-driven earnings growth. If those assumptions are challenged, the resulting repricing could be amplified by leverage, concentration and interconnected funding structures.

Global bond markets remain a concern

Beyond AI, the RBA continues to monitor vulnerabilities in sovereign bond markets.

Government debt levels remain elevated across several major advanced economies, while rising bond yields are increasing debt-servicing costs. At the same time, leveraged investors such as hedge funds have become increasingly important participants in government bond markets.

These trends matter because sovereign bond markets sit at the centre of the global financial system. A disorderly repricing in government bonds could spill into broader asset markets, tighten financial conditions and impair market functioning. Australia would not be immune to such an event, given the close relationship between domestic and global financial markets.

The RBA is not forecasting such an outcome. But it regards these developments as vulnerabilities that could amplify the consequences of a future shock.

The good news: Australia remains resilient

For all the attention given to emerging risks, the review is ultimately more optimistic about Australia's immediate financial stability outlook than many readers might expect.

The RBA repeatedly emphasises the resilience of households, businesses and banks. Most households continue to hold significant savings and equity buffers, while mortgage arrears remain relatively low. Even under adverse scenarios involving further housing price declines, most borrowers are expected to remain in positive equity.

Australian businesses are also generally viewed as being in sound financial health. While stress remains elevated in some sectors, particularly construction, hospitality and transport, the broader corporate sector entered this period with relatively strong balance sheets, manageable leverage and substantial cash buffers.

Perhaps most importantly, the banking system remains well capitalised. The RBA's stress testing suggests banks could absorb significant losses under severe downturn scenarios while continuing to lend to households and businesses. Lending standards have remained prudent and banks' reliance on offshore wholesale funding has declined substantially over time.

The central bank is similarly relaxed about some areas that have attracted considerable market attention, including private credit. While concerns around governance, transparency and investor protection remain, the RBA currently views private credit as relatively small in the Australian context and not a material threat to system-wide financial stability.

A different kind of financial stability challenge

The most important takeaway from the review is that the RBA is increasingly preparing for crises that do not resemble those of the past.

The vulnerabilities worrying policymakers today are less about overheating housing markets or weak bank capital and more about how technology, geopolitics and finance intersect in an increasingly connected world. A cyber attack, critical infrastructure outage, geopolitical escalation or abrupt reassessment of AI-related valuations could generate stress that spreads quickly across markets and institutions.

Yet the report is far from alarmist. The RBA's broader assessment is that Australia's financial system remains in a strong position to absorb shocks. Households, businesses and banks all retain significant resilience, and regulators are actively focused on strengthening preparedness for a more uncertain world.

If there is a warning in the report, it is not that a crisis is imminent. Rather, it is that the next major disruption may emerge from unexpectedly combining technological, geopolitical and financial forces, and may test parts of the financial system that were not at the centre of previous crises.

 

To discover more call 1300 683 106 or email us on NAB Private Wealth Investor Desk

View all Investment Insights and Articles

 

Important information:

The information contained in this article is believed to be reliable as at October 2026 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article. Any forecasts or views about future events are not guaranteed and may change. Past performance is not a reliable indicator of future performance. The views expressed are those of the author and are current as at the date of publication.

© 2026 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. NAB Private Wealth is a division of National Australia Bank Limited.

Investments