Local banks get RBA's tick of approval

The Reserve Bank of Australia (RBA) continues to give its approval to the performance of the domestic banks despite the current stress on financial systems.

The RBA said in its half-yearly Financial Stability Review that the Australian banking system has performed well in contrast to banks in many other countries.

"The banks continue to report solid profits, albeit lower than in recent years, are soundly capitalised, and the larger banks have high credit ratings," the RBA said.

The global financial system was under the most strain since the 1930s and the price of risk has risen accordingly, the RBA noted.

"A notable feature of the current crisis has been the marked increase in the price of risk, after risk had been underpriced in many markets for a number of years," the central bank said.

The RBA noted governments around the world had provided support to financial institutions and markets in many countries.

"These action have helped support depositor confidence and have ensured that banks are able to tap capital markets to meet their funding needs," the RBA said.

"They has also helped improve the functioning of short-term markets."

The RBA said the federal government's action to guarantee the deposits in local banks and banks' wholesale debt funding had worked well since its introduction last October.

"These arrangements has been successful in sustaining deposited confidence and in ensuring that Australian banks have continued access to capital market funding."

As well, large cuts in key interest rates had bolstered the finances of some households, the RBA noted.

Since September, the central bank has cut the cash rate by 400 basis points from a six-year high of 7.25 per cent to a 45-year low of 3.25 per cent.

"The ratio of interest payments to household disposable incomes is likely to fall from its peak of over 15 per cent to around 11 per cent in the March quarter 2009," the RBA said.

"A further decline should occur in the June quarter as the full effect of earlier falls in interest rates flows through.

"This will bring back the interest-payment ratio back to levels last seen around 2003/4."

The bank said housing prices in Australia had held up better than in many other countries over the past year.

Australian house prices have declined by around four per cent since peaking in March 2008, compared with falls of around 10 to 25 per cent in the US and almost 20 per cent in the United Kingdom, the RBA said.

While falls in local house prices could occur, it was unlikely the sector would have similar declines as in the US, the RBA said.

"Also differentiating the housing market in Australia from that of the United States is that the demand for new housing in Australia has outstripped net new additions to the housing stock over much of the past decade, suggesting there is substantial underlying excess demand for housing," the central bank said.

The arrears rates on housing loans for Australian banks remained low despite rising in the past year, the RBA said.

"The proportion of loans that were non performing in December 2008 was 0.48 per cent, up 16 basis points over the previous 12 months," the RBA said.