Australian Banks and Economic Environment Positive
In a world analysis Australian banks have been found to pose a low degree of risk to the global financial system. According to Dr Robert Engle, the 2003 winner of the Nobel Prize in Economics and a professor of finance at Stern School of Business at New York University, the Australian banking system is robust and capitalized enough to endure another financial crisis.
He said the economic environment was positive from an Australian perspective and that the liquidity measures that had been implemented were proving to be effective. The comments were made as part of Dr Engle’s presentation on systemic risk within the worldwide financial system, at a conference endorsed by the University of New South Wales.
Asian and U.S. Banks Pose Greater Risk than Australian Banks
His financial analysis of a number of banks from advanced economies demonstrated how some of the Asian banks put the financial system at risk. The analysis found Japanese banks to pose the greatest risk when it came to recapitalization costs, at $700 billion. The United States followed in second place with $600 billion. As far as systemic risk in Europe is concerned the UK came in first with $400 billion, followed by France with $350 billion. Dr Engle said that Australia had the potential to balance out the volatility posed by Asian financial systems but that France had to be watched carefully in Europe, as the center of stability in the Eurozone. The systemic risk posed by the Australian financial system was estimated at only $50 million in the analysis.
Australian banks, like Bankwest, do feature in the top 20 world banks when it comes to market capitalization but they are not considered to be “systematically important” to require a capital buffer for protection. Despite their low risk profile however Aussie banks still have an extra tier of regulation to go through and the new regulations will make it more difficult for them to stay above water.
The release of the data coincided with other news from Fitch, a credit rating company that the outlook for the banking sector was positive and profitable even though the demand for loans was weaker and the economy was going through a slow-down in activity. According to Fitch the Australian banking sector is expected to be stalled in 2013 because of the slow uptake of credit but advances in funding, resilience and profitability would protect it for the best part of 2013.
Engle also said that despite growing arrears for businesses not involved in mining, the increase in charges for bad debt was anticipated to be modest. He added that the global financial system needed an additional $3-trillion in capital if it was to be able to endure another financial crisis. His suggestion was to raise the funds from tax payers’ money as this was the only viable option available. He also highlighted that Japanese and French banks needed the most monetary support. He cautioned that risk weights, the formula that banks applied to their assets in order to work out how much they needed to set aside had often been misguided and that regulators had made mistakes.
Critics have highlighted that despite his claims that Australian banks can provide much-needed equilibrium in the Asia-Pacific the new regulations to the local banking industry will make international interventions more expensive. The regulations have been defended however by the Reserve Bank’s assistant governor who believes that the resilience is worth paying a higher price for. Critics also defended banks’ decisions to make loans more expensive in light of the current economic pressures bearing down on them. Others have said that even though the local banking system is considered relatively stable, Aussie banks would probably end up having to hold more local capital.