Fri, Apr 07, 2023 page10

• Banks strong, households resilient to rate hikes: RBA

  • Bloomberg
  • • 
    • 
    • 

  Australia’s lenders are “unquestionably strong,” and its households and firms are well-placed to cope with higher interest rates and inflation, the Reserve Bank of Australia (RBA) said, seeking to alleviate concerns about potential fallout from global financial turmoil.

  “Banks are well regulated, strongly capitalized, profitable and highly liquid,” the RBA said in its semi-annual Financial Stability Review, released yesterday in Sydney.

  “This leaves them well positioned to continue lending to Australian households and businesses,” the review said.

  

  Reserve Bank of Australia Governor Philip Lowe speaks at a business summit in Sydney on March 8.

  Photo: Bloomberg

  The report comes a month after bank collapses and bailouts in the US and Europe prompted the US Federal Reserve and five other central banks to undertake coordinated actions to boost liquidity in their standing US dollar swap arrangements.

  The crisis of confidence drove financial markets to price in an end to the aggressive global tightening cycle.

  However, policymakers in a number of jurisdictions continued to see inflation as the greater threat, with the US Federal Reserve, the European Central Bank and the Reserve Bank of New Zealand among those that pushed ahead with rate hikes in the past few weeks.

  The RBA proved an outlier to that trend, pausing its almost yearlong tightening cycle this week at 3.6 percent

  Its board wants to assess the economy given policy lags and signs of slowing inflation, RBA Governor Philip Lowe said.

  The RBA said in the review that the global banking sector is in a much stronger position than a decade ago, and that higher rates were a trigger, rather than a cause, of the stress. In particular, it pointed to Australian banks’ capital and liquidity positions as being well above regulatory requirements.

  Even so, the country’s prudential regulator is supervising financial institutions “more intensively than usual,” the RBA said.

  It is reviewing lessons learned from this recent bank crisis “to ensure Australia’s regulatory regime remains fit for purpose and our financial system remains resilient” the review said.

  The central bank warned of a potential rise in the share of households and firms falling into arrears on their loans, while pointing out that any increase in banks’ non-performing loans would occur from a “very low level.”

  “Further, the share of banks’ loans in or close to negative equity is negligible, which helps limit the losses to both borrowers and banks in the case of default,” the RBA said. “This reflects the generally sound lending standards and the large run-up in housing prices over recent years.”

  The RBA also published an analysis on “indebted households’ spare cash flows and prepayment buffers” which showed that even in an adverse scenario where economic growth contracts and unemployment rises to 5.5 percent, most borrowers would see their spare cash flows remain positive.

  It also said that the broader financial stability implications would likely be limited.

  The report showed that a quarter of Australia’s home loans are still on fixed rates and face large increases in their scheduled payments when they roll off over the next two years.

  The RBA expects these borrowers to transition well given that they have had “considerable time” to prepare for the coming increase and have substantial savings in mortgage prepayments and other forms.
• Most Popular

  • 1

    TSMC to start building four new plants

  • 2

    Manila enhancing defense cooperation with Taiwan: report

  • 3

    Greenpeace calls for cooler outdoor spaces for children

  • 4

    Taiwan attack would unleash China: Rudd

  • 5

    Air drills in Taipei tomorrow, public transport affected