A strong banking system helped cushion Australia from the worst of the global financial crisis, the Reserve Bank (RBA) says.
RBA assistant governor (financial system) Malcolm Edey said the domestic financial system had been “more resilient” than its overseas counterparts during the crisis as its profits were robust and therefore could keep lending.
“This is not always a popular point to make, but it’s a great advantage during an economic downturn to have a banking system that remains profitable and is able to continue lending,” Dr Edey told the Financial System Developments in Australia Forum in Sydney on Wednesday.
“In 2008, the major banks in the US and Europe moved sharply into loss, though some have returned to profit this year.
“Australian banks, in contrast, have so far experienced only a small decline in their aggregate profitability,” he said.
“They continue to earn a high rate of return on shareholders equity overall.”
Dr Edey said local banks held fewer high-risk assets than most of their overseas counterparts had heading into the global crisis that erupted in September 2008.
“This has been particularly evident in banks’ lending for housing,” he said.
“Although there has been some pick-up in housing loan arrears for Australian banks, the overall impairment rate remains very low.
While the rate of impaired loans was expected to rise from a current 0.6 per cent, it was below comparable rates in other nations.
“In the United States, for example, the legacy of high-risk lending has contributed to a build-up in non-performing housing loans from less than one per cent of the bank’s loan book to five per cent,” he said.
“In the UK, the figure is around three per cent.”
A rebound in equity markets since March, a lift in business and consumer confidence and a narrowing of credit market spreads indicated investors were becoming optimistic about the global economy, Dr Edey said.
“I have to give the usual caution that the situation is still very uncertain, and further setbacks are still possible,” he said.
“But without making predictions, it’s reasonable to say there are encouraging signs now that confidence is improving.”
The disruption to wholesale credit markets had the main impact on Australian financial institutions during the financial crisis, Dr Edey said.
“One important consequence of that has been an increase in banks’ wholesale funding costs relative to the cash rate,” he said.
“Heightened competition for deposits has also added to relative funding costs.”
Smaller banks were beneficiaries of the federal government’s deposit guarantee scheme introduced last November, Dr Edey said.
“If we look at the absolute levels of deposits … it makes it clear that, proportionately, the regional and other smaller Australian banks experienced the largest growth in deposits in the period after the guarantee was announced,” he said.
A revamped system of financial regulation being worked on by national governments would require banks to have more capital and to take less risk, Dr Edey said.
“They (regulators) will be paying greater attention to the way risks interact across the financial system, in addition to the conventional focus on the safety of individual institutions,” he said.