Confidence was returning to world financial markets, allowing the relatively resilient local banking system to increasingly borrow without a government guarantee, a top Australian central banker said on Wednesday. In a speech on financial services, Reserve Bank of Australia (RBA) Assistant Governor Malcolm Edey again highlighted the strengths of domestic banks and their ability to keep lending even as credit elsewhere dried up.
Edey, who heads the central bank's financial system division, pointed to a rebound in global equity markets, a recovery in consumer and business confidence and a narrowing in credit spreads as reason to be optimistic on the global outlook. "It's reasonable to say there are encouraging signs now that confidence is improving," said Edey.
Government guarantees for banks' wholesale funding had played an important part in stabilising markets, though Edey emphasised these were emergency measures which should be allowed to expire as planned. "In this regard, its encouraging to note that Australian banks have again begun to issue significant amounts of unguaranteed debt in the last month or so," he said.
Australia's banks had fared better than most others through the crisis, he said, being profitable and well capitalised. While that had been some pick-up in housing loan arrears for Australian banks, the overall impairment rate remained very low at just over 0.6 percent, said Edey. In contrast, non-performing housing loans accounted for 5 percent of the loan book at US banks, and 3 percent in the UK.
The overall stock of non-performing assets at Australian banks was low, at around 1 percent of total assets, far below the peak of 6 percent hit in the 1991 recession. Australia's banks had gained market share in deposits, largely from branches of foreign banks, and grabbed a larger chunk of the mortgage market as non-bank lenders struggled to raise funds.
The four major local banks now held over 80 percent of the owner-occupied mortgage market, compared to around 62 percent a couple of years ago. "But to put this in perspective, this has followed a lengthy period when the major banks were losing market share, and the recent movements can be expected to start unwinding as securitisation markets recover," said Edey.
He also noted that the strength of the banks meant there had been no shortage of housing finance overall in Australia, with loan approvals rising 20 percent in the past six months. Turning to bank regulation globally, Edey said authorities were moving to a world where banks were going to be required to hold more capital and to take less risk. In this, regulators would need to strike a balance as tighter restrictions would also add to banks cost of doing business, and to the incentive to shift business into the less regulated parts of the system.