The Reserve Bank of Australia (RBA) believes more borrowers are likely to default on their loans in the near future, but that risks to the financial system are limited.

“Australian banks are well prepared to handle an expected increase in loan losses in the period ahead. This expected increase in loan losses would be coming from a very low base,” the RBA said in its most recent Financial Stability Review.

“Banks’ overall capital levels are high, profits are healthy and the very low percentage of borrowers in negative equity on their loans further protects banks against credit losses. The recent stress test conducted by the Australian Prudential Regulation Authority concluded that large banks could continue to make credit available to borrowers even in a severe (but plausible) economic downturn. Banks also have strong liquidity positions, which should assist them if there were to be temporary funding market disruptions.”

Meanwhile, risks to financial stability from non-bank financial institutions are “relatively contained”, according to the RBA, with about half the non-bank sector comprising “prudentially regulated superannuation funds, which have low leverage and the ability to pass on investment risks to their members”.