Australian banks low-risk: economist
Robert Engle, a professor of finance at New York University's Stern School of Business, said the world "looks pretty rosy from Australia's point of view" and that the liquidity measures used during the global financial crisis appeared to be effective.
Speaking at a University of New South Wales-backed banking conference Dr Engle presented a paper outlining measures to identity sources of systemic risk in the global financial system.
The analysis of risk by the 2003 winner of the Nobel Prize in Economics, found that banks in some of Australia's Asian neighbours, such as Japan, posed sizeable risks to the world's financial system.
Japanese banks were the world's largest source of systemic risk, in terms of the cost of recapitalisation, with $US700 billion ($665 billion), while the US was second with just under $US600 billion, he said.
"I think that Australia can play an important role in understanding and helping to stabilise this growth of risk in Asia," Dr Engle said.
France, with $US400 billion, and the UK, with $350 billion, were the two largest sources of systemic risk in Europe, Dr Engle said, adding that France was the country that had to be watched. "If France is in trouble, there's no centre left in the European zone," Dr Engle said.
Australian banks' systemic risk was estimated to be about $US50 million, according to Professor Engle's data.
While Australian banks rank among the top 20 global banks in terms of market capitalisation, global regulators do not regarded them as "systemically important" enough to the global financial system to be required to carry an extra cushion of capital.
But Australia's big banks are still expected to face an extra level of monitoring. Rules are being thrashed out that will force domestically important financial institutions to come under additional regulatory scrutiny by the Australian Prudential Regulation Authority.
Dr Engle's comments came as a credit ratings agency Fitch said yesterday that Australia's banking sector would remain stable and highly profitable, despite a slowing economy and a weak demand for loans.
Tim Roche, Fitch's financial institutions director, said while subdued credit growth and a moderate economic slowdown would pose challenges for Australian banks in 2013, "improvements to funding, liquidity and capital, and continued solid profitability should help them to navigate through these headwinds".
An emerging economic slowdown would likely lead to higher arrears in non-mining businesses, but the increase in bad debt charges was expected to be modest, Fitch said.
The report echoed rating agency Moody's outlook for Australian banks in 2013, which was released earlier this month.
Frequently Asked Questions about this Article…
Yes. According to Nobel laureate and NYU economist Robert Engle, Australian banks are well capitalised and could withstand another financial crisis. Credit agency Fitch also said the Australian banking sector should remain stable and highly profitable despite a slowing economy and weak loan demand.
Robert Engle presented research showing Australia looks relatively low-risk from a systemic perspective. His analysis estimated Australian banks' systemic risk at about $US50 million (per his data) and suggested Australia could help stabilise growing financial risks in parts of Asia.
Engle's analysis identified Japanese banks as the largest source of systemic risk (about $US700 billion in recapitalisation cost), the United States second (just under $US600 billion), and in Europe France ($US400 billion) and the UK ($US350 billion) as the biggest sources of systemic risk.
No. Although some Australian banks rank among the top 20 global banks by market capitalisation, global regulators do not consider them systemically important enough to require the additional global cushion of capital. However, domestically important institutions are expected to face extra monitoring by the Australian Prudential Regulation Authority (APRA).
Yes. The article says rules are being developed that will bring domestically important financial institutions under additional regulatory scrutiny by APRA, meaning big Australian banks should expect a higher level of monitoring at home.
Fitch said Australia's banking sector would remain stable and highly profitable despite a slowing economy and weak loan demand. Fitch’s financial institutions director, Tim Roche, noted that improvements in funding, liquidity and capital, along with continued solid profitability, should help banks navigate those headwinds.
Fitch warned that an emerging economic slowdown would likely lead to higher arrears in non‑mining businesses. However, the agency expected the increase in bad debt charges to be modest rather than severe.
Yes. The article notes that Moody’s released an outlook for Australian banks earlier in the month that echoed Fitch’s view for 2013, indicating broadly similar assessments from major ratings agencies.
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