2019 financial stability through the lens of business | speeches | rba have flow - on effects to bank balance sheets through increasing non - performing loans and defaults. but poorly performing businesses in one sector could also feed through to employment and businesses in other sectors, amplifying the effect. for example, poorly performing retail businesses might impact workers as well as owners and developers of shopping centres. farm businesses that are affected by the drought will reduce their expenditure on capital and labour as well as their expenditure on discretionary consumption, impacting a range of businesses in their communities. and these impacts in turn will be reflected in banks'asset quality if households and businesses find it more difficult to service their loans. furthermore, while specific shocks to a particular business sector may not have immediate financial stability implications, they can mean that businesses in that sector are, for some time, more vulnerable to broader macroeconomic shocks. so it is important for us to understand and assess the impact of idiosyncratic shocks on balance sheet health. in addition, some developments can be quite specific to business conditions in particular regions, and to those financial institutions that have extended credit to businesses and households in those regions. the end of the mining investment boom, for example, had significant implications for the economy and businesses in mining intensive regions, such as western australia and parts of queensland. this in turn has seen large falls in housing prices and increases in arrears in these regions. however, banks appear to be managing this, and the increase in arrears does not currently pose a risk to financial stability. nonetheless, it does illustrate that in assessing the financial stability implications of business conditions, it is important to give some consideration to sectors, regions, and even the size of the firms. in the rest of my speech, i will discuss some aspects of business conditions that are relevant to thinking about financial stability. i will start with some information on businesses in aggregate. i will then talk a little about some individual sectors and i will finish up with a focus on the small business sector. conditions in the business sector there are a number of metrics we use to look at the financial health of firms. profitability or return on equity give an indication of the general health of the business. firms with low profitability are more likely to cease operations due to poor performance and, in the process, potentially default on their debts. gearing looks at how much debt relative to equity there is in the business. firms with high gearing are more vulnerable

financial stability through the lens of business | speeches | rba 08 / 08 / 2019 speech financial stability through the lens of business michele bullock [ * ] assistant governor ( financial system ) address to the toowoomba chamber of commerce toowoomba – 8 august 2019 thank you to the toowoomba chamber of commerce for inviting me to speak with you today. it is a pleasure to be here. i have spoken about financial stability from a number of perspectives in the past – resilience of the banking sector, developments in the property sector and developments in the household sector. today i want to talk about financial stability from the perspective of the business sector. in our regular, we always discuss the corporate sector balance sheet and its resilience. today i want to draw out some of the issues we have been focusing on in recent months. financial stability review but, first of all, what is financial stability and why is it important? as i have said in the past, there is no universal definition. but basically, it is when the financial sector is doing its job of facilitating a smooth flow of funds in the economy to support economic growth. the opposite, financial instability, is probably easier to picture though. this is where the financial sector is experiencing disruptions so that it harms the economy. the global financial crisis, or gfc, was a very vivid demonstration of what can happen when the financial system is unstable – credit supply dries up, investment and consumption fall and unemployment rises. so there is a very human cost to financial instability. while we at the reserve bank do not have responsibility for the supervision of financial institutions, we do have an important role in monitoring the financial system as a whole and the economy for financial imbalances that could lead to instability. we typically look at such things as developments in financial markets, and, in particular, evidence of excessive risk - taking behaviour, the balance sheets of financial institutions and their resilience to changes in economic circumstances, and household and business balance sheets. part of our role is to draw attention to potential risks that might be building and have an impact on the stability of the financial system. why are developments in the business sector relevant for financial stability? one obvious link is that if businesses are struggling to meet their obligations, they impact on the real economy and this could https : / / www. rba. gov. au / speeches / 2019 / sp - ag - 2019 - 08 - 08. html 1 / 13 08 / 08 /