Reserve Says Less Risky Approach To Credit Is On Cards

The Age

Tuesday September 25, 2007

Nassim Khadem, economics correspondent, Canberra

THE turmoil in financial markets has encouraged a more cautious attitude to risk, which could prolong global economic expansion, the Reserve Bank says.

In its latest financial stability review, the central bank warns there may be "further bouts of market turbulence and strained liquidity conditions" ahead. But it says the tightening of credit, prompted by the US subprime mortgage crisis, is welcome and will increase competition in Australia between traditional and non-bank lenders, with the main banks being the winners.

The review also dismisses worries about higher mortgage defaults, saying that, by historical standards, default rates are low, and that the household sector remains strong.

The review says that after several years during which credit was provided freely and risk was underpriced, the recent turbulence means credit will no longer be available on such generous terms. "Some adjustment in risk spreads is to be welcomed, increasing the likely durability of the current global expansion," it says.

The increase in funding costs is likely to affect the nature of competition in the Australian financial system, it says: "Traditional lenders that rely relatively heavily on retail deposits to fund their loans are likely to see their competitive position improve, and this in turn is likely to see more loans funded on the balance sheets of financial institutions, rather than in the capital markets."

Funding costs for local banks have risen following the global credit turmoil, with providers of non-conforming loans (the closest equivalent to the US subprime mortgage market) raising their rates by more than the Reserve Bank's .25 percentage point rise last month, the review says. The three largest non-conforming lenders (which account for 70 per cent of the market) have increased their rates by up to 0.9 of a percentage point.

But the RBA says the main banks are generally healthy, with high levels of profitability. "Balance sheets have continued to grow strongly over the past year, bad loan expenses remain low, and banks have benefited from strong growth in income from their funds management operations," it says.

The review says that while household debt has risen sharply, the value of assets has also grown. "The fact that the value of assets significantly exceeds the value of liabilities means that, despite the latter growing more quickly, household net worth has increased at an average rate of 11 per cent over (the past) two years."

Despite the increase in average debt servicing ratios - the ratio of housing debt to income has jumped from 62 per cent to 138 per cent over the past decade - only a small proportion of households are experiencing difficulties in meeting debt repayments, "although this share has increased over recent years".

As at the end of June, the ratio of the value of non-performing housing loans to total housing loans stood at 0.41 per cent, a rise of about 0.2 of a percentage point since mid-2003.

The number of court applications for property repossessions increased over the year to August, reaching 5605 in NSW and 2775 in Victoria, but the RBA says these figures overstate the number of repossessions because borrowers can choose to sell their property or refinance the loan.

theage.com.au

? See the review at theage.com.au/businessday

© 2007 The Age

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