As the world’s financial markets faced another bout of anxiety, Australia’s central bank said the local banking system remained in good shape but warned against lowering standards to boost growth.
“The Australian banking system remains in a relatively strong condition compared with some overseas,” the Reserve bank of Australia (RBA) said on Friday in its twice-yearly Financial Stability Review (FSR).
Bank share prices had suffered some falls and there had been some tightening in wholesale funding, the RBA said.
But overall, it said, the impact “has been modest compared with the effect in 2008/09 or with some other countries currently”.
Even in the euro area, where anxiety over the sovereign debt problems of Greece and other countries in the region is rife, the RBA said there was less uncertainty over problem exposures than there was during the earlier crisis and less risk of contagion.
“This is partly because sovereign bonds are less complex than the structured securities that sparked the crisis, and partly because recent supervisory stress test results provided detailed data to markets about those exposures.”
As for Australian ADIs (approved deposit-taking institutions, which include banks), the RBA said they had reported little exposure to euro-area government debt and “none at all to Greek sovereign risk”.
But the RBA is still alert to home-grown problems, despite low levels of bad debts.
Business loans still make up the bulk of Australian banks’ non-performing loans, but there have been some falls in their volume recently.
And, despite some upward drift recently due mainly to loans made before 2009 when lending standards were not so tight, housing loan arrears remained low by world standards and most problem loans remained well-collateralised, the RBA said.
But the RBA’s task is to avert further problems, so it was at pains in the FSR to warn against an erosion of lending standards.
Bank profitability had risen back to around pre-crisis levels, the RBA said.
“However, the scope for banks’ domestic balance sheets to expand is likely to be more limited than in the years preceding the crisis, given the more cautious approach of the household and business sectors towards leverage (the amount of borrowing compared with assets).”
The RBA said the more cautious attitude to borrowing among both households and businesses was as not likely to change in the near term.
“Adapting to this environment would help avoid the risks that would be involved in trying to sustain earlier growth rates, for example by lowering lending standards or imprudently expanding into new products or markets,” the RBA said in the FSR.
And it’s not just banks and other lenders who will need to lower their hopes for growth.
“In these circumstances, shareholders may need to revise their expectations about the future growth in ADI profits.”
So far, so good, though.
The RBA said lending standards were still tighter than before the crisis and, despite some tightening in wholesale markets, the funding environment for Australian banks had been favourable.
With recent improvements in liquidity, funding and capital positions, the RBA said the Australian banking system “is better placed to cope with periods of strain than it was before the (2008-09) crisis”.
