The RBA’s FSA is out today. It focusses heavily upon European risks and improvements in Australian bank stability. Though I’m not sure why, given we already had the most secure and well regulated financial system in the world.
The whole document would send you quickly to sleep but there is a quite useful breakout box that makes for some fun reading. First the good news is the obvious improvement (that wasn’t needed) in many financial system funding metrics:
But another table also shows the ongoing problem:
As you can see, on just about every criteria in this hand-picked table we are one of the worst performers. That’s not say we’re more unstable than the others, especially since the banks and public finances continue to be indistinguishable (and so long as you don’t mind that fact), but my view is that the sum of the parts remains quite high risk: large wholesale exposure, low sticky funding ratios, moderately high external dependence and very high lending on this combination. Clearly the system which shares the most similar profile is Sweden, which also has a housing bubble. But compare it so the US where a similar external dependence sits atop a much more sticky funding structure.
Basically this is why Australian bank funding costs and CDS prices continue to rise and fall on a one-to-one basis with wider global financial risk appetites despite obvious improvement in the structure of the system.
No doubt that’s why the RBA used the same document to warn folks to keep saving their buns off:
The household and business sectors have continued to display a relatively prudent approach towards their finances in recent quarters. Many households continue to prefer saving and paying down their existing debt more quickly than required, which has contributed to household credit growth being more in line with income growth in recent years. Although there are some isolated pockets of weakness, aggregate measures of financial stress remain low. Ongoing consolidation of household balance would be desirable from a financial stability perspective, as it would make indebted households better able to cope with any future income shock or fall in housing prices.
…banks have reduced their relative use of wholesale funding further as growth in deposits has continued to outpace growth in credit.
While the Australian banks have little direct asset exposure to the most troubled euro area countries, they remain exposed to swings in global financial market sentiment associated with the problems in Europe.
Or anywhere else.
