cross-posted from: https://scribe.disroot.org/post/4881855

While the massive fall in share and bond prices in response to Donald Trump’s Liberation Day tariff announcement in April was short-lived, the Reserve Bank has warned that risks remain “elevated” with the outlook “clouded in uncertainty”.

Indeed, the bank’s latest half-yearly Financial Stability Review warns those risks are increasing, not receding.

“The possibility of a material shock to the international financial system is rising,” it warned.

The Reserve Bank of Australia (RBA) is comfortable with the health of Australia’s financial system, but warns that three key global vulnerabilities loom large.

The first of those is the potential for disruptive major falls in global asset prices, given that share and other asset prices have kept increasing, with investors pricing in perfection and an extremely low risk of anything going wrong.

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“Highly leverage trading strategies employed by hedge funds, liquidity mismatches among bond funds, concentration in equity markets, and interlinkages across the global financial system, have the potential to amplify an adverse shock.”

The Reserve Bank noted the concentration of investors piling into the top ten companies on the US share market, mainly tech stocks, which now account for more than 40 per cent of the S&P 500 index’s total value.

While many investors seem to have taken comfort in the market’s spectacular rebound from early April’s Liberation Day crash, the RBA instead argues that investors and many financial institutions narrowly dodge a bullet.

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Another key risk cited by the Reserve Bank is the potential for widespread cyber disruptions that could spiral into a broader crisis, especially if they coincide with a period of market stress.

“Advancing digitalisation of the financial system also increases the prospect that cyber-attacks and operational incidents could have systemic implications,” the RBA warned.

The bank is particularly worried about the increasing reliance of large financial institutions — such as banks, superannuation funds, insurers and investment funds — on common tech service providers.

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The third major worry for the Reserve Bank remains China’s ailing property sector, and its general economic weakness.

“Persistent weakness in the property sector, amid a structural rebalancing in the Chinese economy, remains a vulnerability for real estate companies, local government finances and the wider Chinese financial system,” the RBA cautioned.

China’s property price downturn is so far worse than Japan’s infamous crash of the early 1990s, which resulted in the “lost decade” of economic growth or, as it turned out, a lost few decades.

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