The Reserve Bank of Australia’s Financial Stability Review October 2022 says that the key risks to the financial system are:

1. Financial conditions could tighten further, leading to disorderly declines in asset prices and disruptions to financial system functioning;

2. As debt-servicing challenges increase, a turn in the credit cycle is likely; a sharp increase in unemployment would magnify these challenges;

3. Threats from outside the financial system – including cyber-attacks, geopolitical tensions and climate change – continue to pose risks to financial stability.

The Review concludes that it is probable that a significant financial institution or market infrastructure will be subjected to a successful cyber-attack at some point given the increasing sophistication and frequency of cyber-attacks. This could create considerable difficulties for the institution or market concerned and undermine confidence in the broader financial system. It says that the growing risk of cyber-attacks calls for stepped-up investment in cyber defence capabilities and increased focus on contingency and recovery plans.

The Review observes that worsening geopolitical tensions present a growing risk to macroeconomic and financial stability. A deteriorating geopolitical environment has the potential to lead to widespread disruptions to global trade and capital flows. It could also magnify the risk of cyber-attacks on key institutions and infrastructure.

Finally, the Review says that climate change and extreme weather events have the potential to affect economies and societies on a global scale, and thereby present a systemic challenge for private institutions and policymakers. Both physical and transition risks could result in large losses for financial institutions that are yet to put in place adequate risk controls and resilience strategies.

It discusses financial stability risks from Crypto-assets here.

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