Global financial conditions improved significantly, but the euro area faces notable challenges to its stability, the Reserve Bank of Australia said in its semi-annual Financial Stability Report on Wednesday.

The negotiations over the Cyprus rescue package underline the problems in some euro area nations and the challenges to resolve them. Nonetheless, a strong commitment from the European policymakers to deal with sovereign debt and banking sector problems boosted confidence over the last six months.

The bank observed that improvement in global financial market sentiment contributed to a rally in risk assets across a range of markets, consistent with increased risk appetite.

The banks in Australia registered strong profits in recent periods, boosting capital positions and putting them in a 'good position' to meet the Basel III capital requirements that began to be introduced in Australia this year, the RBA said.

Further, the bank noted that Australia's households prefer to repay existing debt rather than take on new debt. Debt-servicing capacity has also been boosted by lower interest rates.

As such, housing loans arrears and other measures of financial stress remains low despite high unemployment rate.

RTTNews