Bleak households will sit tight until debts are reduced, but Reserve says banks can take it

THE bleak mood engulfing households is unlikely to lift any time soon, the Reserve Bank says, as consumers seek to rein in historically high debt levels.

By InvestSMART · 24 Sep 2011

By InvestSMART ·
24 Sep 2011

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THE bleak mood engulfing households is unlikely to lift any time soon, the Reserve Bank says, as consumers seek to rein in historically high debt levels.

In its latest review of the nation's financial health, the central bank warns the "prevailing mood of caution" in households will remain for now, amid signs of fragile confidence among consumers.

While this is likely to result in subdued credit growth for banks, the Reserve said the nation's lenders were in good health, and were prepared to cope with any crisis on credit markets.

The Financial Stability Review, published yesterday said the increasingly severe tremors on global markets were affecting the balance sheets of banks, businesses and households.

Although the ratio of household debt to income has fallen slightly, the Reserve said its current level of 154 per cent was "quite high", and many households were making extra repayments to get on top of their mortgages.

It noted the rising number people falling behind on their loan repayments, and the erosion of household wealth caused by recent market turmoil.

Australian shares are down more than 10 per cent since the start of July. This has wiped more than 5 per cent of the value of a typical superannuation fund.

"Given that household net worth declined in the wake of renewed volatility in global financial markets, the prevailing mood of caution appears unlikely to lift in the near term," the central bank said.

The Reserve also said the latest wave of turmoil appeared less serious than the meltdown that followed the collapse of Lehman Brothers in 2008 - though it did not rule out another crisis.

Any "contagion effects" would be more limited than 2008 because sovereign debt was better understood than the complex securities that spurred the turmoil of 2008.

Although share prices of the big four local banks have been battered in recent weeks, they had only experienced small increases in wholesale funding costs compared with 2008.

"The Australian banking system is considerably better placed to cope with periods of market strain ... having substantially strengthened its liquidity, funding and capital positions," the report said.

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Frequently Asked Questions about this Article…

Why does the Reserve Bank say households are in a 'bleak mood' and how long might that last?

The Reserve Bank's Financial Stability Review says households are cautious because of high debt levels, falling household net worth after recent market turmoil, and more people falling behind on repayments. It warns the prevailing mood of caution is unlikely to lift in the near term as many consumers focus on reducing debt.

What is Australia’s household debt-to-income ratio and why does it matter for investors?

The review notes the household debt-to-income ratio is around 154%, which it describes as 'quite high.' For investors this matters because high household leverage can suppress consumer spending and credit growth, which in turn can weigh on economic growth and company earnings.

Will subdued credit growth hurt the banks, according to the Reserve Bank?

The Reserve Bank expects subdued credit growth as households rein in borrowing, but it also says lenders are in good health and are prepared to cope with credit-market stress. Banks have strengthened liquidity, funding and capital positions to handle periods of market strain.

How have recent market swings affected superannuation and household wealth?

The article says Australian shares are down more than 10% since the start of July, which has wiped more than 5% off the value of a typical superannuation fund and contributed to a decline in household net worth.

Is the current market turmoil as severe as the 2008 global financial crisis?

The Reserve Bank judges the latest wave of turmoil to be less serious than the meltdown after Lehman Brothers in 2008. It believes any contagion effects would be more limited now because sovereign debt is better understood than the complex securities that sparked the 2008 crisis—though it did not completely rule out the possibility of another crisis.

What has happened to the share prices and funding costs of the big four Australian banks?

Share prices of the big four local banks have been battered in recent weeks, but the Reserve Bank notes they have only experienced relatively small increases in wholesale funding costs compared with what occurred in 2008.

How resilient is the Australian banking system to further market stress?

According to the Financial Stability Review, the Australian banking system is considerably better placed to cope with periods of market strain because it has substantially strengthened its liquidity, funding and capital positions since 2008.

What should everyday investors take away from the Reserve Bank’s Financial Stability Review?

The review highlights continued household caution, high household debt, weaker household net worth and recent share-market falls that have hit superannuation values. It also reassures that banks are in stronger shape than in 2008, but it notes the possibility of further market volatility—points investors may want to monitor when assessing risk exposure.