MNI POLICY: RBA Sees Australian financial system "resilient"

By Lachlan Colquhoun

     SYDNEY (MNI) - Australian banks are sufficiently well capitalised and

household debt levels are manageable enough for the financial system to contain

any damage from a potential economic downturn, the Reserve Bank of Australia

said Friday in their latest Financial Stability Review.

     Even an ongoing fall in the housing market, which the Bank says is 7% below

its 2017 peak, is containable as stress testing of the Australian banks has

found they can withstand double digit unemployment rates and house price falls

of more than 30%.

     While acknowledging an increase in downside risks, both from the

international and domestic economy, the FSR says the Australian financial system

is resilient enough to withstand any shocks at least as large as the "majority

of historical crises."

     The FSR says the system's "ability to withstand shocks continues to

strengthen" as bank capital ratios have increased and households have paid down

debt over the last decade.

     --LOW UNEMPLOYMENT

     The Bank points to low unemployment - currently around 5% -- low levels of

corporate debt and an improvement in the quality of new loans issued by banks as

major sources of financial stability.

     "Measures of financial stress among households are generally low and

households remain well placed to service their debt given low unemployment, low

interest rates and improvements to lending standards," the FSR says.

     Acknowledging that a large number of households are carrying high levels of

debt, the Review says that "most households" are well placed to service this

debt.

     While the Bank has conducted simulated modelling exercises which point to

the resilience of the system, the Review points to actual conditions in Western

Australia as a microcosm of what could happen to the wider economy if the

downside risk plays out.

     "Housing loan arrears rates in Western Australia have been increasing but

are currently still less than 2%," the FSR notes.

     The main risk to Australia, the Review says, is a scenario where indebted

households curtailed consumption in response to economic shocks "which would

compound economic weakness and so indirectly affect the financial system."

     Overall, though, "the financial system appears much better placed to

respond to a range of challenges than it was a decade ago," the report says.

     --UNUSUAL CONDITIONS

     Current economic conditions are "unusual" because property prices are

falling in an environment of low interest rates and strong employment.

     While the prevalence of negative housing equity was low, larger price falls

would see the further erosion of household equity which could move into negative

territory for some households which purchased at the top of the market.

     Although just under 3% of all housing loans are currently considered to be

in situations of negative equity, this posed the greatest financial risk, with

the overbuilt apartment sector of the market most exposed.

     "This would increase the risk of costly defaults for lenders if

unemployment were to rise," the FSR says.

     "Further price falls could also increase lenders perceptions of the

riskiness of housing lending, compounding the somewhat tighter availability of

credit seen to date.

     "Greatly reduced credit supply would be detrimental to the economy and so

financial stability."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]