IMF warns on pending defaults
(19 October 2009 – Australia) The International Monetary Fund (IMF) has warned that Australian banks could lose A$33 billion due to household and corporate defaults.
In two reports on Australasian banks' vulnerabilities, the world's financial system watchdog has said both Australian and New Zealand banks need to undergo tougher stress tests to reduce a potential surge in defaults and to ensure they can roll-over short-term external debt.
The reports reveal a decline in Australian banks’ asset quality since early 2008, showing corporate solvency risks have increase to the point that corporate default losses could reach two percent gross domestic product (GDP) based on historical recovery rates of around 40 percent, the IMF said.
IMF’s Elod Takats and Patrizia Tumbarello wrote in a report released on Thursday, based on information available in July, that banks’ losses could be expected to be two percent of total March 2009 loans, or A$33 billion.
The big fours’ New Zealand subsidiaries are facing mounting exposure to heavily indebted households whose assets have been hit by the reduction of house and equity prices.
The watchdog said that Australian banks should undergo more extreme stress scenarios than previously applied by the Australian Prudential Regulation Authority.
The IMF also highlighted that some key risks still remain, including reliance on wholesale funding, the prominence of financial institutions in Australia’s total GDP, as well as short term debt.
Australian banks rely on domestic and offshore wholesale funding to fund around 50 percent of their balance sheets, with about 60 percent of this coming from offshore investors.
The IMF has also said that by March 2009, before banks embarked on an attack to attract retail depositors, 35 percent of Australia’s GDP or A$400 billion was the total of all Australian financial institutions.
IMF said that a key remaining vulnerability is the roll-over risk associated with sizable short-term external debt.
The reports reveal a decline in Australian banks’ asset quality since early 2008, showing corporate solvency risks have increase to the point that corporate default losses could reach two percent gross domestic product (GDP) based on historical recovery rates of around 40 percent, the IMF said.
IMF’s Elod Takats and Patrizia Tumbarello wrote in a report released on Thursday, based on information available in July, that banks’ losses could be expected to be two percent of total March 2009 loans, or A$33 billion.
The big fours’ New Zealand subsidiaries are facing mounting exposure to heavily indebted households whose assets have been hit by the reduction of house and equity prices.
The watchdog said that Australian banks should undergo more extreme stress scenarios than previously applied by the Australian Prudential Regulation Authority.
The IMF also highlighted that some key risks still remain, including reliance on wholesale funding, the prominence of financial institutions in Australia’s total GDP, as well as short term debt.
Australian banks rely on domestic and offshore wholesale funding to fund around 50 percent of their balance sheets, with about 60 percent of this coming from offshore investors.
The IMF has also said that by March 2009, before banks embarked on an attack to attract retail depositors, 35 percent of Australia’s GDP or A$400 billion was the total of all Australian financial institutions.
IMF said that a key remaining vulnerability is the roll-over risk associated with sizable short-term external debt.
Subscribe