It’s now clear the Reserve Bank’s priorities have shifted away from the health and strength of the financial system, towards making sure it gets the timing right on the first of what could be a few rates rises.
The second Financial Stability report for 2009, released yesterday , is very different in tone and content from the first one back in March.
That’s when we wondered if the financial crunch and recession would roll across and sweep us into a deep slump, like it had done to many of the major economies of the world.
But recede it did as markets regained their poise, following multi-year lows touched around March 9.
So strong has been the rebound that some equity markets are up 50%: Asia is rebounding, dragged forward by China, and that includes the Australian economy (and New Zealand, as we learned yesterday is back in positive territory).
Now the big policy questions for the bank are the everyday ones of inflation, resources, bottlenecks, government, business and private spending, aggregate demand, unemployment and the most appropriate level for interest rates.
The central bank no longer has to look over its shoulder and wonder if a financial institution might strike trouble or be dragged down by a failure or problem offshore.
The world’s financial system is more stable and Australia’s is through the pressures and out the other side.
In contrast, the US Federal Reserve confirmed that its economy was recovering, but said the many programs designed to help the economy, business and consumers, would remain in place, with interest rates remaining at their current rates of 0% to 0.25% for "an extended period".
In other words, the US economy remains very weak, and despite the rally in markets and bank shares, financial groups are not yet clear of the woods there.
In Australia the RBA has moved beyond that as it has become increasingly confident the global economy had survived the battering, and Australia has emerged intact.
Now, relegated to committees here and internationally, and to discussions with industry are the big policy questions of new rules for banks, bank remuneration, capital levels, capital types and failure.
"As foreshadowed in the March Review, substantial work is underway around the world to reconsider financial regulations in light of the lessons from the financial crisis," the RBA said.
"Much of this work is being co-ordinated through major international forums including the G-20, the Financial Stability Board and the Basel Committee on Banking Supervision.
"Key areas of focus include capital and liquidity standards, systemic risk, compensation and incentives, and accounting standards.
"Australia is an active participant in these discussions, and the Reserve Bank will be working closely with other domestic authorities to consider Australia’s response to these international regulatory developments," The RBA said.
The lead banking regulator, APRA, has already released a draft paper on the new capital requirements, which goes with the new remuneration requirements.
The recovery in confidence and re-emergence of risk as being acceptable to investors means the RBA and other central banks no longer have to worry about what happens if a bank that is too big to fail; quivers.
So in the latest financial stability report, the RBA was more relaxed than in March.
"In summary, global financial conditions remain challenging. But, while further setbacks cannot be ruled out, the severe downside risks that loomed six months ago have significantly abated.
"The resilience of the Australian financial system through the crisis period has reflected a combination of factors including the comparatively mild nature of the overall economic slowdown in Australia, the absence of large-scale exposures to structured securities, and relatively conservative lending practices, particularly for housing.
"While loan losses may rise further in the current environment, Australian banks remain better placed than their counterparts in many other advanced economies to weather any further adverse developments in the global financial system."
The Report discloses that home loan arrears rose again, but at a more subdued rate. While rates on no doc or lo doc non conforming loans remain high. These loans are only around 0.50% of all housing loans.
The bulk of the home lending either remains on the banks’ books or have been securitised.
"By loan value, the share of non-performing housing loans on banks’ balance sheets was around 0.6 per cent in June, and around 0.9 per cent for securitised loans.
“Although these rates are higher than the low points seen in the earlier part of this decade, they are still low relative to international experience," the overview said.
"In aggregate, it is estimated that currently around 25 000 households are 90 or more days in arrears on their housing loans, compared with a (revised) estimate of around 23 000 at the end of 2008.
"Across all housing loans in Australia, it is estimated that around 20 000 borrowers were 90 or more days behind on their mortgage repayments in December 2008, compared with an estimate of 13 000 the previous December.
Well over $112 billion has been raised in the past 14 months by listed companies in secondary issues and that recycling of savings from the market to the balance sheet of listed companies, has been an important reason why many companies in this country, especially in the still stretched property sector, have survived.
The banks have raised $14 billion in new capital, enough to pay for all expected bad debts and to build capital levels towards the new, higher levels.
Now there’s pressure on the Federal Government to end the guarantee of bank deposits and allow the banks t
