Despite the constant media predictions that we’re all heading for financial doom and armageddon, The RBA has issued a rather upbeat prognosis of Australia’s financial system suggesting that we may, once again, dodge the worst of the global recession, as we did in the Asian financial crisis and the “tech wreck” in 2001-02.
In a report published in The Australian, The RBA says that, while the banks of many countries are in the worst state they have been in since the Great Depression, our banks are highly profitable and still increasing their lending.
Although bad debts are rising, they remain very low compared with either other countries or previous recessions in Australia, and the Reserve Bank believes that households and business are in great shape to withstand the global downturn.
The bank’s upbeat assessment, contained in its twice-yearly review of financial stability published yesterday, said the Australian financial system has weathered the current challenges better than many other financial systems.
The Reserve Bank believes there is little chance of Australia’s housing market plunging as it has in the US and Britain, deepening the financial turmoil and undermining consumer spending.
“While further softness in the Australian housing market is possible, the market does not appear to have the same vulnerabilities that have been evident in some other countries,” it said.
Although business is finding it harder to get finance, few have been unable to refinance themselves when debts fall due.
Even in the commercial property sector, the $5.3 billion in new loans since last June has outstripped the $3.4 billion in repayments.
The Reserve Bank gave credit to the Government’s guarantees of bank deposits and wholesale funding, which it said had forestalled a run on the banks and had secured their access to funding.
It disclosed that there had been a jump in demand for banknotes following the collapse of Lehman Brothers last September, a sign that people were losing confidence in keeping their money in the bank. It said there had also been large shifts in deposits from smaller banks to the majors.
“With the safety of deposits no longer a notable concern for the public, the period since the introduction of the guarantee has seen continued strong deposit growth,” it said.
The banks have used the guarantee of wholesale funding to strengthen their balance sheet, repaying $95 billion in short-term debt and replacing it with longer-term finance.
Wayne Swan said the Reserve Bank’s comments proved the wisdom of the Government’s use of guarantees to bring needed stability.
“The importance of this simply can’t be underestimated in the midst of the chaos that has unfolded on financial markets internationally over the past year or more,” the Treasurer said.
The Reserve Bank said the strength of Australia’s finance system was evident in strong profits, low exposure to high-risk securities and continuing high credit ratings.
The Reserve Bank said Australian banks had been able to concentrate on profitable and relatively safe domestic lending to households over the past decade. They had not lent heavily abroad, where risks are higher, and they had avoided exposure to securities, such as collateralised debt obligations, that have brought such heavy losses to other banks.
The Reserve Bank said part of the credit was due to Australia’s consumer credit code, which allows courts to overturn mortgages if banks lend to people who they should know would have trouble meeting the payments. This had stopped the irresponsible lending that had occurred elsewhere.
The Reserve Bank believes Australia’s households are in good financial shape, and with the added boost of government cash hand-outs, incomes in the December quarter were 14 per cent higher than a year ago.
Households have become much more careful about borrowing, with debts rising more slowly than income for the first time in many years.
While much needs to be done to fix the global financial system, efforts are well underway and markets are beginning to show glimmers of hope as investors begin to realise that now is the ideal time to buy.
Filed under: Australian Economy |