Financial Stability

A key objective of the Council of Financial Regulators (CFR) is to promote stability of the Australian financial system.

What is Financial Stability?

A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors. By doing so, they help promote growth in the economy and the welfare of Australians. Conversely, financial instability – where there is a serious disruption to this intermediation process – can severely damage the economy.

Safeguarding financial stability can be seen to be a forward-looking task – one that seeks to identify vulnerabilities within the financial system and, where possible, take corrective action. Some financial vulnerabilities have a direct macroeconomic dimension, such as the condition of household and corporate sector balance sheets, and developments in lending and asset markets. These have the potential to affect the level and distribution of financial risk within the economy. Other vulnerabilities relate to the way in which financial intermediaries and financial market participants price and manage their various risks.

In addition to identifying and addressing potential risks, the maintenance of a resilient financial system requires well-developed crisis management arrangements. These should allow for a distressed financial institution or financial market infrastructure to be managed in a way that minimises costs, while maintaining public confidence in the financial system.

What Role Does the CFR Play in Promoting Financial Stability?

The CFR provides a forum for identifying important issues and trends in the financial system, including those that may affect overall financial stability. It is also responsible for ensuring that there is an appropriate framework and coordination arrangements for responding to actual or potential instances of financial instability.

Australia's financial stability policy framework involves a mandate for financial stability for each of the four CFR member agencies:

  • The Reserve Bank of Australia (RBA) has had a longstanding responsibility for financial stability. A common understanding with the Government on this responsibility is recorded in the Statement on the Conduct of Monetary Policy.
  • The Australian Prudential Regulation Authority (APRA) is required to promote financial system stability in Australia while balancing its objectives of financial safety and efficiency, competition, contestability and competitive neutrality.
  • The Australian Securities and Investments Commission (ASIC) is responsible for taking certain regulatory actions to minimise systemic risk in clearing and settlement systems, working with the RBA.
  • The Australian Treasury has responsibility for advising the Government on financial stability issues and on the legislative and regulatory framework underpinning financial system infrastructure.

The combination of: complementary financial stability mandates; a structured inter-agency coordination process through the CFR; and strong bilateral relationships between agencies, has provided Australia with a strong, flexible and effective framework for managing financial stability.

For more information on the institutional framework for financial stability policy in Australia, along with the processes and practices of systemic risk oversight and policy-making, see the Macroprudential Analysis and Policy in the Australian Financial Stability Framework.