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Reserve Bank downplays financial risksFinancial Stability Review
Reserve Bank Financial Stability Review: The Reserve Bank has handed down the latest review of the financial system: “The resilience of Australian banks has increased over the past decade.” The Financial Stability Review has implications for finance providers, the broader sharemarket and interest rate settings.
What does it all mean?
The Reserve Bank has provided a detailed assessment of current risks in its semi-annual update on the financial sector. The Reserve Bank has downplayed the risks that “an excessive tightening in lending standards could exacerbate the current housing slowdown.” Overall, the Reserve Bank conveys a sense of confidence that risks to the financial system remain low and manageable.
There are certainly no major shocks in the latest report on the financial system. If anything there is a quiet confidence that risks may dissipate in coming years due to the tighter lending standards being applied by financial institutions.
Certainly the Reserve Bank believes that households are well placed to meet debt repayments. And good economic conditions are supporting Aussie businesses.
What do the figures show?Reserve Bank Financial Stability Review
Overall, the RBA noted: “At present, households in aggregate appear well placed to manage their debt repayments. Total payments as a share of income have remained broadly in line with their levels over recent years.”
Global risks: “the extended period of low interest rates has seen some financial stability risks emerge. Notably compensation for risk is very low with asset prices in a range of markets at high levels, underpinned by low longterm interest rates. Household, corporate and sovereign debt has also risen to high levels in some jurisdictions. For emerging market economies – especially those with structural or cyclical vulnerabilities – there are concerns about the implications of a tightening in financial conditions in theadvanced economies.”
External exposure: “Australia would be sensitive to a sharp contraction in global growth or dislocation in global financial markets because of the importance of trade and capitalinflows.”
External exposure: “…downside risks to growth have become more prominent since the previous Review, particularly due to the rise in trade protectionism.”
Household debt: The Reserve Bank doesn’t believe that high household debt poses risks to the financial system, rather represent risks to the economy. “Highly indebted households could cut back their consumption if their financial position were to be less secure.”
Banking Royal Commission: “The response of financial institutions will, over time, contribute to a more resilient financial system.”
Tighter lending conditions: “It is possible, although not likely, that an excessive tightening in lending standards could exacerbate the current housing slowdown.”
Tighter lending standards: “Overall these changes should improve the resilience of borrowers taking out their maximum loan, without having a material effect on aggregate credit availability and growth.”
Tighter lending conditions are… “strengthening the resilience of household and bank balance sheets.”
Housing: “Conditions in the housing market have eased, reflecting shifts in both supply and demand. Sentiment towards the housing market has become more cautious and this has been reflected in a slowing in demand for housing finance, particularly from investors.”
Interest-only loans: “…while most borrowers with loans transitioning from interest-only to principal and interest payments are well placed to meet the higher payments, a small share could struggle.”
Business: “Financial conditions for businesses continue to be supported by positive economic conditions and the low interest rate environment.”
Financial stress: “Reliable and relatively timely indicators point to pockets of household financial stress, but this is not widespread.”
Housing prepayments: “currently amounts to 18 per cent of outstanding mortgages or nearly three years of scheduled repayments.”
Housing markets: “Supply of new housing is expected to exceed population growth for some time, although low or falling vacancy rates and broadly stable rents indicate that new supply is generally being absorbed without disruption.”
What is the importance of the economic data?
The Financial Stability Review is published by the Reserve Bank every six months. The report is basically a health check on the financial sector but it also assesses the state of household and business balance sheets.
What are the implications for interest rates and investors?
The Reserve Bank continues to closely monitor the Aussie housing market and the debt levels of households.
There are no implications for interest rates from the latest Financial Stability Review.
published by Craig James, Chief Economist, CommSec