The Reserve Bank’s latest Financial Stability Review is good news for the country and for everyone who has a loan, an account or is a shareholder.
Despite the sharp fall in bank share prices in the past two months and the apparent rise in clients with problem loans, the RBA has given the country’s financial system a big tick, despite those strains from the credit crunch here and overseas.
In fact the RBA’s comments call into question much of the doom and gloom written and spoken about the banks.
In the first of the Financial Stability Reports for 2008, released yesterday the RBA says
"In Australia, the financial system has coped better with the recent strains than have the financial systems of many other countries.
"Despite the strains in global financial markets, the underlying resilience of the Australian financial system, together with the relatively favorable outlook for the domestic economy, means that the system is much better positioned than the financial systems of many other countries to cope with the current difficulties."
"The banking system remains highly profitable and well capitalised, with the banks having minimal direct exposure to the sub-prime problems in the United States."
That was a line RBA Governor, Glenn Stevens pushed in a speech earlier yesterday, before the report was released in which he said Australian banks are "weathering the storm” caused by the slump in global credit markets, remain profitable and have "sound” capital reserves.
"The Australian financial system is in sound shape and is weathering the turbulence in financial markets better than the financial systems in many other countries. The largest banks continue to report high levels of profitability, low non-performing loan ratios and strong capital positions," the RBA said in the latest Review.
"Banks’ balance sheets have also continued to expand rapidly, underpinned by strong growth of lending to the business sector.
"Against this favourable backdrop, recent developments in global financial markets have posed a number of challenges for the Australian financial system.
"In particular, while the demand for funding from banks has increased, the cost of financing this demand, in both domestic and offshore markets, has risen significantly.
"The banking system has been able to provide this additional financing, with deposits growing strongly and banks continuing to be able to raise a significant amount of funding in both domestic and international wholesale markets.
"The strains in credit markets are, however, having an effect on the nature of competition in the financial system.
"Most notably, difficulties in the RMBS markets are affecting the institutions that rely heavily on this source of funding to a greater extent than other lenders, and there has been some tightening of credit conditions in the mortgage market.
"There are also signs that the terms on which finance is available to some segments of the business loan market have tightened, with some foreign financial institutions looking to scale back their business lending in Australia."
The upshot of the changes, especially in the securitisation area and the drop off in business for non bank lenders, is that the major banks are back in control of the home loan market, which is the banks’ best business because of the low capital requirements.
The RBA points out that in big loans (above $2 million) the banks have recaptured market share as ‘reintermediation’ has occurred: that’s when businesses return to banks for loans and other products after going straight to the market.
But in the small and medium area, the bank points out that about 20% of all loan activity involves a broker advising or arranging the deal for a client, which doesn’t seem to have been hit as much by the crunch.
By the time the effects of the crunch have eased, the big five banks in particular will have regained market share, revenue and profits (not to mention more fee and other income).
They will be more powerful than before, and yet to look at the stockmarket valuations, there seems to be elevated levels of concerns among investors.
"The credit ratings of the larger banks remain high, with none of them having been put on negative credit watch or having their ratings downgraded.
"This strong standing of the banks has contributed to rapid growth in their deposits over the past six months, and they continue to be able to raise significant volumes of funds in both domestic and international capital markets.
"The solid position of the Australian banking system partly reflects the high quality of its assets, with the banks having considerably less risky portfolios than banks in many other countries. While lending criteria were relaxed over recent years, credit standards in Australia did not fall by nearly as much as they did in the United States.
"Notwithstanding this favourable position, the changed credit environment has had a significant impact on the Australian financial system. As is the case in other countries, bank share prices are down considerably and funding costs have risen significantly.
"These higher funding costs have been largely passed through to business borrowers.
"Lenders have also increased their mortgage indicator rates by more than the rise in the cash rate, after these rates had moved together for the past decade. In addition, lenders have tightened credit standards, particularly to firms with complex and highly leveraged balance sheets.
"These changes in the cost and availability of funding are having a significant effect on the nature of competition within the system.
"In particular, the market for securities backed by housing loans has been disrupte
