Australia bad loans to rise, banks can take shocks: CFR

AUSTRALIA’S slowing economy and rising interest rates are likely to drive higher housing and business loan losses for banks, regulators said, while adding that lenders’ “unquestionably strong” capital requirements mean they can withstand any shock.

The Council of Financial Regulators (CFR), which includes the Reserve Bank of Australia (RBA), said that it will “continue monitoring credit growth, asset price developments, lending standards and system-wide resilience”, according to a statement on Wednesday (Mar 15).

Banks’ “unquestionably strong capital requirements, combined with Liquidity Coverage Ratio and Net Stable Funding Ratio requirements to reinforce liquidity and funding resilience, mean the system is well-positioned to adjust to evolving economic conditions and other external shocks”, the council said.

The RBA is in the midst of its most aggressive tightening campaign in a generation, having raised interest rates by 3.5 percentage points since May from a record low 0.1 per cent. It has signalled that borrowing costs are likely to move even higher to counter inflation, though policymakers are also considering a pause to assess the impact of hikes to date.

“The council recognised that there is significant variation in experience across borrowers, with a small share of households with high levels of debt relative to their income and low savings and equity buffers experiencing debt-servicing challenges,” the statement said.

Shares of the country’s largest lenders climbed in early Sydney trading on Wednesday. ANZ Group Holdings added 1.3 per cent, Westpac Banking rose 1 per cent, Commonwealth Bank of Australia gained 0.8 per cent and National Australia Bank was up 1.3 per cent.

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The CFR’s quarterly meeting was held Mar 10 to discuss the impact of elevated inflation and rising rates on households and the financial system. Subsequent to that, members met again to discuss steps taken by US authorities following the sudden collapse of Silicon Valley Bank.

The Australian Prudential Regulation Authority, in consultation with CFR agencies, “will continue to closely monitor the situation through its intensive supervision of the Australian banking system, which remains strongly capitalised and highly liquid”, the statement said. BLOOMBERG