The Reserve Bank has published a structured framework for understanding how geopolitical instability — from armed conflict to state-sponsored cyberattacks — could destabilise Australia's financial system, with flow-on consequences for borrowers, lenders, and property markets.
The paper, authored by RBA economists Jeremy Lwin and Gideon Holland, is part of the June 2026 Bulletin and reflects a growing focus among central banks globally on geopolitical risk as a financial stability concern.
The timing is deliberate. Ongoing conflicts in the Middle East and Ukraine, combined with escalating cyber activity by state-linked actors, have prompted regulators including APRA to step up their assessment of system-wide vulnerabilities. APRA has noted that approximately 70% of regulated entities have identified this as a key business risk over the next two years.
The framework identifies four pathways through which a geopolitical shock could transmit stress into the financial system.
The first and fastest is through financial conditions — market volatility, disorderly price falls, and a sudden tightening of funding access. The second is through the real economy, where trade restrictions, commodity supply disruptions, and weakened confidence could dampen growth, push up inflation, and increase unemployment. Both pathways have direct implications for mortgage serviceability and borrowing capacity.
The third pathway — safety and security — encompasses cyberattacks, disinformation campaigns, and infrastructure disruption. The paper notes that a disinformation campaign targeting a bank's perceived financial health "could trigger more rapid deposit runs than have been experienced in the past."
The fourth pathway involves international policy responses such as sanctions, capital controls, and trade tariffs, which the authors warn could amplify rather than cushion economic stress — a key distinction from conventional financial crises.
Of the five risk types identified in the RBA's framework, credit and liquidity are the most directly relevant to the lending market.
On credit, the paper notes that while Australian banks' direct offshore exposures are relatively contained at around 15% of total assets, a severe and prolonged geopolitical shock could still transmit domestically through tighter financial conditions, weaker economic growth, and falling property prices — leading to increased borrower stress and rising non-performing loans.
On liquidity, the authors flag that a geopolitical scenario could generate deposit outflows well beyond what standard regulatory buffers are designed to absorb, noting the Reserve Bank of New Zealand's 2025 stress test incorporated a scenario with "materially higher" assumed cash outflows than those underpinning the standard Liquidity Coverage Ratio.
The RBA and the Council of Financial Regulators are already working with industry to strengthen preparedness, integrating geopolitical considerations into routine supervisory activities. Understanding global risk is now as relevant to client conversations as understanding local credit policy.
There is, however, some reassurance — APRA's May 2026 System Risk Outlook found Australia's banking system can withstand a deep recession, a spike in funding costs, and serious operational disruptions at once, stating that "strong capital, liquidity, and prudential safeguards mean our financial system is well-positioned to absorb shocks and continue providing critical services to households and businesses, even if economic conditions deteriorate.”
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