Never mind the strains imposed by the global credit crunch, the Reserve Bank has given the Australian financial system a big tick.

In its first Financial Stability Review for 2008, released today, 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 favourable 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.

It was a line the RBA Governor, Glenn Stevens pushed in a speech earlier today, 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.

But buried deep in the report is the real news: the RBA has given the Federal Government a plan to insure deposits at authorised deposit taking institutions (ADIs) such as banks up to a maximum of $20,000. We can thank the Northern Rock collapse, and the poor way it was handled by british regulators, for that:

This experience is consistent with the Council’s previous analysis that arrangements in Australia would be enhanced by the establishment of a scheme to repay depositors in a failed authorised deposit-taking institution (ADI) in a timely fashion. Under the existing legislation, depositors rank ahead of other creditors in a failed ADI, although they are likely to have to wait some time before they could be repaid. Given this, the Council is working on an Early Access Facility, which would provide early repayment of up to $20 000 per depositor in a failed institution; it is estimated that this cap is sufficient to cover the entire deposits of around 80 per cent of depositors. Such a facility was recommended to the previous Government, and is before the current Government.

The RBA also warn about the impact of the recent rise in interest rates on households finances:

The recent tightening of financial conditions and weaker financial asset markets are putting more pressure on many households’ finances than has been the case in recent years, a period in which the household sector has benefited from strong growth in incomes and wealth.

Looking ahead, arrears rates on loans could be expected to increase somewhat from current levels, which are low by historical and international standards. Household finances overall, however, remain in sound shape, although there are continuing pockets of stress. In the months ahead, the Reserve Bank will continue to closely monitor developments in household balance sheets.

The RBA pointed out that the level of repossessions (foreclosures in US parlance) in parts of Western Sydney appears to have peaked and have moved “sideways” over the past year, indicating the pressure seen in 2006 and 2007 has eased. Repossession rates in other parts of Sydney have fallen but the RBA said:

Looking forward, an increase in arrears is likely due to both the further working out of this structural adjustment, and the recent tightening of financial conditions for the household sector. Since July 2007, interest rates paid on new prime full-doc loans and new prime low doc loans have increased by about 125 basis points and 140 basis points, respectively, while rates for more risky non-conforming loans have risen by around 210 basis points.

The RBA also put the arrears rate for housing, especially in NSW, in some perspective:

The arrears rate has been higher in New South Wales than in other parts of Australia, with loans in this state tending to be for larger amounts than the national average. As a result, the number of housing loans 90-days past due as a share of the total number of housing loans is smaller than the comparable figure for the value of housing loans. It is estimated that, at present, around 15 000 borrowers are more than 90 days behind on their mortgage repayments, while an additional 25 000 are between 30 days and 90 days in arrears.

There are around 5.2 million housing mortgages in Australia.

And while giving business a clean bill of health (even after the troubles of Allco, Centro and MFS), the RBA warned:

One market that will bear close watching in the period ahead is the commercial property market. Office vacancy rates are low across the country, and prices and rents have increased sharply. The pressures are particularly pronounced in the Perth and Brisbane markets where there is currently very little vacant office space available. Average rents in both cities for prime office space are now more expensive than in Sydney, increasing the possibility of a correction at some point in the future.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey