Australian banks have become less vulnerable to international financial shocks, a central bank official says.
While Australian banks still need foreign funds to on-lend to local borrowers, the amount has declined significantly since the global financial crisis that started almost four years ago.
Additionally, the banks have protected themselves from the risks posed by their overseas borrowing by converting the interest payments into Australian dollars, using a process known as hedging.
That meant the Reserve Bank of Australia (RBA) could bail them out more easily in a financial crisis, assistant governor Guy Debelle said.
“The RBA would be able to meet a temporary liquidity shortfall by lending in Australian dollars against a stressed bank’s assets,” Dr Debelle told a financial stability conference in Sydney.
This was in contrast to European banks that funded lending in the US with money borrowed in the US.
When the European banks couldn’t access money for their day-to-day activities, the European Central Bank was limited in what it could do to help them.
Dr Debelle’s reassurance comes as the Greek parliament prepares to vote on new austerity, or cost-cutting and tax-raising, measures to save the debt-ridden country from defaulting.
There are fears that if Greece does default, the problem could spread to other European countries such as Portugal and Spain.
That would mean even more money would be needed to bail out countries and banks.
Dr Debelle said a default by Greece would be different to the collapse of Lehman Brothers and Bear Sterns, which deepened the global financial crisis in 2008.
“Lehmans was sitting there with a whole bunch of financial linkages all over the financial system,” he said.
He said the financial linkages of Greece to the rest of the world were a lot less and were better known.
“You can’t say that you didn’t see Greece coming,” he said.
Dr Debelle also said the effect on Australia was unlikely to be large.
“At this stage at least, there is no sign of any of those stresses materialising,” he said.
The inter-bank market, which shows how much banks charge to lend money to each other, suggested the Greek situation hadn’t made banks less willing to lend.
It was certainly nothing like 2008, when inter-bank pricing showed that banks had completely stopped lending to each other.
Another factor that was reducing Australian banks’ need for offshore funds was households increasing savings and paying down debt, Dr Debelle said.
He said annual growth in lending for housing had slowed to five to six per cent, from the double digit pace seen between 1987 and 2007.
Less lending means less need for the bank to borrow to fund those loans.
Additionally, increased savings had boosted the amount of deposits banks held, which could be used to fund loans. Full Article…
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