SYDNEY – Australian banks are in a good position to face an economic downturn driven by coronaviruses, the country’s central bank said, but warned of the vulnerability of household debt and the risk of a slump in the property market.
In its biennial Financial Stability Review, the Reserve Bank of Australia (RBA) said the country’s lenders had entered a decline with high profitability and “very good” asset performance.
“The strong initial position” of the banks has supported the ability of the financial system to absorb, not strengthen, the effects of the pandemic, the RBA said.
“Australia’s financial system is strong and well-placed to support households and businesses through this difficult period and in the recovery that will follow,” said RBA Assistant Governor Michelle Bullock.
Large Australian banks have solid financials, with their Tier-I core capital allocation far above the level considered by the country’s cautious regulator “very strong”, the review said. They are also very profitable with very low loan losses.
The RBA said the recent monetary and fiscal stimulus measures would help the country’s banks, businesses and households overcome the economic storm.
The central bank last month cut interest rates to a record low of 0.25% and launched an unlimited bond purchase program. The government has promised A $ 320 billion in various support measures, including wage subsidy schemes.
But in spite of these steps, the RBA said “an increase in business failures and loan arrears is likely over the coming months.”
The central bank points to several “pockets of vulnerability” in the household sector with only about one in five households having enough liquid assets to plug from one payment period to the next.
Among households with mortgage debt, only under a third of mortgages have less than one month’s prepayment, and about half of this appears to be very vulnerable to a sharp decline in income, the RBA said.
There are also some risks in the property market.
When demand for new homes falls, the incidence of negative equity will increase if house prices start to decline sharply.
Auction volume and permit levels have declined in the two largest markets in Sydney and Melbourne.
“There is considerable uncertainty around the trajectory of economic shocks and subsequent recovery,” the RBA warned.
“It is important that financial institutions remain strong so that they can support households and businesses during this difficult period and during recovery once the health crisis has passed.”
(Reporting by Swati Pandey; Editing by Shri Navaratnam)
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