Australia Markets closed

What bubble? The financial sector is fighting fit

What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

Also read: Banks and Telstra pulling ASX down – so what stocks are a ‘buy’?

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system.

Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.

If there was any hard evidence of weakness in the banking sector and indebted households, you could rest assured investors would be dumping bank stocks, driving the share price lower, much as they did around the world during the global financial crisis.

Banks share prices remain strong, with price changes in recent times more linked to the imposition of the bank tax and some regulatory changes which may crimp future profits than from fears of a crash.

As it has with every Financial Stability Report, the RBA did note a number of risks. Possible problems. Issues that might, if things turn bad, be a problem. Indeed, this is the function of the report – to flag potential areas of concern, even if there is a low probability of these risks coming to fruition.

Also read: Two Australian cities made the top 10 where crime is low, hospitals plentiful, and families feel safe

Encouragingly, many of these risks are more contained now than in recent years, given the policy action of the various regulators of the financial system to improve lending standards and from better practices from the lenders themselves.

A cap in lending for investment purposes and interest only loans has had a positive impact. The RBA notes that as a result of these changes, many new borrowers have greater buffers against income losses or higher interest rates.

The RBA did, however, note that there are “some concerns” for the household sector if they “experience large declines in income”.  Unfortunately, there is no elaboration of this point, which seems to be a statement of the obvious rather than any genuine assessment that incomes are at risk of falling by a “large” amount.

The corollary is that if incomes remain unchanged, financial stress will remain low.

In the end, the RBA cannot find and does not present any hard evidence of an increase in financial stress from the household sector. This is good news as the economy looks to negotiate its 27th year without a recession. Indeed, another year of economic growth looks assured in these circumstances with a strong financial system providing the mechanism that allows borrowers to access credit to fund sound investment and spending opportunities.