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

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.