Australian financial health robust, RBA finds
(30 March 2004 – Australia) A report checking the pulse of Australia’s financial markets by the Reserve Bank of Australia has found that the country’s banks are in sound financial health.
According to the RBA’s Financial Stability Review, Australia’s banks are profitable, carry few bad debts and hold capital considerably in excess of their minimum regulatory requirements.
"This outcome is largely the legacy of the long-running expansion of the domestic economy, now in its thirteenth consecutive year of growth, but it also reflects improvements in banks’ systems for managing credit risks following problems in the early 1990s," the report said.
It went on to say that over this period there had been a significant shift in banks’ assets away from business lending towards lending to households, which were traditionally a much lower risk activity for financial intermediaries.
The report said that while there was "indications of an increase in risk in mortgage portfolios" it remained difficult to envisage scenarios in which developments in the housing market alone could cause major difficulties for the Australian financial system.
"Taking a somewhat broader perspective, a more medium term risk is that, after borrowing heavily for a number of years, the household sector will decide to consolidate its balance sheet," the report said.
"If that were prompted by deterioration in economic conditions it could amplify what might otherwise have been a relatively mild downturn – an outcome that, in turn, would increase the credit risk in the balance sheets of financial institutions.
The RBA said there had been few instances historically in which balance-sheet adjustment by the household sector had been a major factor in shaping an economic downturn.
"In previous episodes, it has been adjustments by the corporate sector and by financial institutions that typically have been the source of difficulties – and the risks of problems emanating from that front currently look quite small on this occasion," the report said.
"This outcome is largely the legacy of the long-running expansion of the domestic economy, now in its thirteenth consecutive year of growth, but it also reflects improvements in banks’ systems for managing credit risks following problems in the early 1990s," the report said.
It went on to say that over this period there had been a significant shift in banks’ assets away from business lending towards lending to households, which were traditionally a much lower risk activity for financial intermediaries.
The report said that while there was "indications of an increase in risk in mortgage portfolios" it remained difficult to envisage scenarios in which developments in the housing market alone could cause major difficulties for the Australian financial system.
"Taking a somewhat broader perspective, a more medium term risk is that, after borrowing heavily for a number of years, the household sector will decide to consolidate its balance sheet," the report said.
"If that were prompted by deterioration in economic conditions it could amplify what might otherwise have been a relatively mild downturn – an outcome that, in turn, would increase the credit risk in the balance sheets of financial institutions.
The RBA said there had been few instances historically in which balance-sheet adjustment by the household sector had been a major factor in shaping an economic downturn.
"In previous episodes, it has been adjustments by the corporate sector and by financial institutions that typically have been the source of difficulties – and the risks of problems emanating from that front currently look quite small on this occasion," the report said.
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