MNI POLICY: Australian Financial System Resilient - RBA FSR

Australia's financial system is resilient but faces "substantial risks" in the commercial property sector and from possible home loan defaults as fiscal support is wound down, the Reserve Bank of Australia said in its Financial Stability Review released Friday.

The RBA said Australian banks are better prepared in 2020 than they were during the global financial crisis in 2008-09 and have "substantially higher levels of capital," which would enable them to absorb shocks.

"Even if the economic contraction is substantially more severe under a downside scenario, banks would remain above their minimum capital requirements," the RBA said.

"Given their strong balance sheets, banks will be well placed to continue lending, supporting the recovery and so, in turn, the Australian financial system," the central bank added.

OFFICE BUILDINGS

The RBA cited the commercial property sector as a major risk as many operators are highly leveraged. Vacancy rates have risen around 10% and are likely to rise further as some businesses such as department stores close their operations.

However, banks' direct exposure to commercial property as a share of assets is ""only 6%, around two percentage points lower than before the GFC," the RBA said.

"Banks' effective exposure to commercial property are somewhat higher than this as some business loans are secured by commercial property," the central bank added.

Problems in this sector are skewed to office buildings in the central business districts of major cities, with industrial commercial property – such as warehouses and distribution centres – thriving during the lockdown due to the e-commerce explosion.

HOME PRICES

In the residential market, the RBA notes that around 7% of Australian mortgage holders have deferred their payments as at the end of August.

Of these, around 15% are at the highest risk of not being able to resume repayments when the mortgage holidays end early next year, affecting banks' asset quality.

Fiscal programs have helped support many households, but unemployment is expected to rise as these programs end. The RBA said that the number of borrowers in mortgage arrears could reach 2% if unemployment reaches 10% this year, as it forecasts.

The share of housing loans currently in negative equity is estimated around 3%. The percentage would roughly double if home prices were to fall by a further 10% and increase seven-fold if the decline is 20%.

The small business sector is also exposed to the downturn, with "at least" 10 to 15% of businesses in the hardest hit industries lacking enough cash to meet monthly expenses, the RBA said.