"Financial system in good shape" RBA
Mar 25th 2004, 11:06 am
#1
Lost in BE Cyberspace
Thread Starter
Joined: Nov 2003
Location: Scotland
Posts: 7,949
"Financial system in good shape" RBA
http://www.theage.com.au/articles/20...939765464.html
Economy in good shape, RBA reports
March 25, 2004 - 12:57PM
The Australian financial system is currently in overall good shape, the Reserve Bank of Australia said today in its first Financial Stability Review.
Banks, the most important financial intermediaries from a systemic risk perspective, were in a particularly strong financial position: they were profitable, carried few bad debts and held capital considerably in excess of their minimum regulatory requirements, the RBA said.
This was as a result of the long-running expansion of the domestic economy, now in its thirteenth consecutive year of growth, but it also reflected improvements in banks' systems for managing credit risks following problems in the early 1990s, the central bank said.
The Financial Stability Review is the first of a new report that the central bank will publish twice yearly, in March and September, from now on, it said.
The RBA said it had joined a growing number of central banks that are assessing their stability mandates through publishing a formal report.
The central bank has periodically outlined its assessment of the state of the financial system in its annual report.
In its review today, published on the bank's web site, the RBA said that over the past decade or so, there has been a significant shift in banks' assets away from business lending towards lending to households, traditionally a much lower risk activity for financial intermediaries.
The reason was two-fold. On the demand side, the shift to a low-inflation, low-interest-rate economy had increased the capacity of households to borrow, with many households willingly taking up this extra capacity.
At the same time, financial intermediaries had been keen to increase their portfolios of relatively low-risk residential mortgages and were providing cheaper, more innovative mortgage products, including those specifically tailored for investor housing, the RBA said.
As such, there had been "striking growth in both residential property prices and household indebtedness since the mid 1990s", the RBA said.
That growth has seen house prices gain by an average annual rate of 12 per cent since the beginning of 1996, the central bank said.
The rise in household debt has been similarly rapid, it added.
"Although the pace of growth is now slowing, it is too soon to know whether it will return to a sustainable rate within a reasonable time," the central bank said.
The RBA cautioned that as a result of these changes, the overall "riskiness" of the mortgage portfolios of financial institutions is likely to have increased.
Conditions which have seen some borrowers who previously would not have been able to obtain mortgages, now able to do so, raises the possibility that default rates may rise beyond what they have been in the past.
"Notwithstanding this, there are currently few signs that households are having difficulty meeting their financial obligations, with default rates on residential mortgages at very low levels despite the aggregate debt-servicing burden standing at a record high," the RBA said.
With the heat in the property market and subsequent rise in borrowing, the RBA said it is difficult to envisage a scenario in which developments in the housing market alone could cause major difficulties for the Australian financial system.
"Recent work by Australian Prudential Regulation Authority (APRA) indicates that even if house prices fell by 30 per cent and mortgage default rates increased dramatically, more than 90 per cent of authorised deposit-taking institutions would continue to meet minimum regulatory capital requirements," the RBA said.
In addressing the global situation, the RBA noted that nominal interest rates in all the key financial centres are at very low levels and have been so over an extended period.
The amount of money flowing from Asia to the United States in order to limit the strengthening of Asian currencies "have been unusually strong", it said.
"The search for yield by private investors has pushed down risk spreads for corporate and emerging market borrowers alike, to levels last seen before the 1998 crisis," the bank noted.
The RBA said there was a question over whether global investors have accurately priced the risk to which they are exposed, and how this constellation of yields, capital flows and exchange rates will respond when international short-term interest rates begin to rise again, at some stage, to rise to levels more in line with historical experience.
These global issues, together with the increased borrowing by Australian households described above, "will bear close watching over the period ahead".
OzTennis
Economy in good shape, RBA reports
March 25, 2004 - 12:57PM
The Australian financial system is currently in overall good shape, the Reserve Bank of Australia said today in its first Financial Stability Review.
Banks, the most important financial intermediaries from a systemic risk perspective, were in a particularly strong financial position: they were profitable, carried few bad debts and held capital considerably in excess of their minimum regulatory requirements, the RBA said.
This was as a result of the long-running expansion of the domestic economy, now in its thirteenth consecutive year of growth, but it also reflected improvements in banks' systems for managing credit risks following problems in the early 1990s, the central bank said.
The Financial Stability Review is the first of a new report that the central bank will publish twice yearly, in March and September, from now on, it said.
The RBA said it had joined a growing number of central banks that are assessing their stability mandates through publishing a formal report.
The central bank has periodically outlined its assessment of the state of the financial system in its annual report.
In its review today, published on the bank's web site, the RBA said that over the past decade or so, there has been a significant shift in banks' assets away from business lending towards lending to households, traditionally a much lower risk activity for financial intermediaries.
The reason was two-fold. On the demand side, the shift to a low-inflation, low-interest-rate economy had increased the capacity of households to borrow, with many households willingly taking up this extra capacity.
At the same time, financial intermediaries had been keen to increase their portfolios of relatively low-risk residential mortgages and were providing cheaper, more innovative mortgage products, including those specifically tailored for investor housing, the RBA said.
As such, there had been "striking growth in both residential property prices and household indebtedness since the mid 1990s", the RBA said.
That growth has seen house prices gain by an average annual rate of 12 per cent since the beginning of 1996, the central bank said.
The rise in household debt has been similarly rapid, it added.
"Although the pace of growth is now slowing, it is too soon to know whether it will return to a sustainable rate within a reasonable time," the central bank said.
The RBA cautioned that as a result of these changes, the overall "riskiness" of the mortgage portfolios of financial institutions is likely to have increased.
Conditions which have seen some borrowers who previously would not have been able to obtain mortgages, now able to do so, raises the possibility that default rates may rise beyond what they have been in the past.
"Notwithstanding this, there are currently few signs that households are having difficulty meeting their financial obligations, with default rates on residential mortgages at very low levels despite the aggregate debt-servicing burden standing at a record high," the RBA said.
With the heat in the property market and subsequent rise in borrowing, the RBA said it is difficult to envisage a scenario in which developments in the housing market alone could cause major difficulties for the Australian financial system.
"Recent work by Australian Prudential Regulation Authority (APRA) indicates that even if house prices fell by 30 per cent and mortgage default rates increased dramatically, more than 90 per cent of authorised deposit-taking institutions would continue to meet minimum regulatory capital requirements," the RBA said.
In addressing the global situation, the RBA noted that nominal interest rates in all the key financial centres are at very low levels and have been so over an extended period.
The amount of money flowing from Asia to the United States in order to limit the strengthening of Asian currencies "have been unusually strong", it said.
"The search for yield by private investors has pushed down risk spreads for corporate and emerging market borrowers alike, to levels last seen before the 1998 crisis," the bank noted.
The RBA said there was a question over whether global investors have accurately priced the risk to which they are exposed, and how this constellation of yields, capital flows and exchange rates will respond when international short-term interest rates begin to rise again, at some stage, to rise to levels more in line with historical experience.
These global issues, together with the increased borrowing by Australian households described above, "will bear close watching over the period ahead".
OzTennis
Mar 25th 2004, 12:28 pm
#2
BE Enthusiast
Joined: Jan 2004
Location: Melbourne
Posts: 400
I think they are pleased to see the property market cooling down at last - helped by the higher mortgage rates they engineered. Some of the debt ratios have begun to look a little scary. In the article on the RBA website they point to many factors that fuelled the house price inflation since 1996, and the aussie principle of "negative gearing" features strongly. I was amazed at the number of taxpayers who claimed tax breaks from rental income - its 1.3 million !! Is everyone in Aus a landlord? Anyway I read that the tax man may tighten up a little on the amounts that can be depreciated which will reduce the attractiveness of buying property as an investment a little.
Mar 25th 2004, 2:15 pm
#3
Lost in BE Cyberspace
Thread Starter
Joined: Nov 2003
Location: Scotland
Posts: 7,949
Originally posted by Jimbo9
I think they are pleased to see the property market cooling down at last - helped by the higher mortgage rates they engineered. Some of the debt ratios have begun to look a little scary. In the article on the RBA website they point to many factors that fuelled the house price inflation since 1996, and the aussie principle of "negative gearing" features strongly. I was amazed at the number of taxpayers who claimed tax breaks from rental income - its 1.3 million !! Is everyone in Aus a landlord? Anyway I read that the tax man may tighten up a little on the amounts that can be depreciated which will reduce the attractiveness of buying property as an investment a little.
I think they are pleased to see the property market cooling down at last - helped by the higher mortgage rates they engineered. Some of the debt ratios have begun to look a little scary. In the article on the RBA website they point to many factors that fuelled the house price inflation since 1996, and the aussie principle of "negative gearing" features strongly. I was amazed at the number of taxpayers who claimed tax breaks from rental income - its 1.3 million !! Is everyone in Aus a landlord? Anyway I read that the tax man may tighten up a little on the amounts that can be depreciated which will reduce the attractiveness of buying property as an investment a little.
OzTennis
Mar 25th 2004, 7:25 pm
#4
Joined: Aug 2003
Posts: 11,149
Funny that considering they just forced National Australia Bank to up its cash levels, forget a share buy back and change its whole risk management strategy. The mini Nick Leeson they suffered could have been a lot worse.
As far as negative gearing goes the ATO is reviewing and threatening a crackdown on the deductions a landlord can make. The fact that new landlords are negatively gearing means they are making a loss.
To make a profit and bring the market back into equilibrium either rent has to rise or prices have to fall. Currently rent is dropping in this area.
As far as negative gearing goes the ATO is reviewing and threatening a crackdown on the deductions a landlord can make. The fact that new landlords are negatively gearing means they are making a loss.
To make a profit and bring the market back into equilibrium either rent has to rise or prices have to fall. Currently rent is dropping in this area.
