IMF Survey: Australian, New Zealand Banks Remain Sound During Global Crisis

IMF News, January 22, 2010

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Australian and New Zealand banks are sound by international standards and have been resilient to the global crisis.
Banks were healthy at the outset of the financial turmoil (which began in mid-2007 in the U.S. mortgage market) and continue to be resilient despite increases in impaired assets during economic downturns.
Banks’ capital ratios have remained well above regulatory requirements.
Large banks had small exposure to U.S. subprime mortgage loans and collateralized debt obligations (CDOs), limiting direct impacts on asset quality.
Conservative capital adequacy rules and regular stress testing helped limit risks.
Large banks are less leveraged than banks in comparable countries; financial soundness indicators have remained strong.
Major banks retained their AA credit ratings and major banking groups were able to raise private equity capital.
Wholesale funding accounts for about 50 percent of total funding at Australian banks.
The four large banks in New Zealand are wholly owned subsidiaries of the four large Australian banks and rely on offshore funding.
Despite severe international market turmoil, banks in both countries generally maintained access to capital market funding (both domestic and offshore) and experienced strong growth in deposits.

Access to offshore wholesale markets was disrupted by the collapse of Lehman Brothers in September 2008.
The establishment of deposit and wholesale funding guarantees by the Australian and New Zealand governments in October 2008, and central bank actions to provide sufficient liquidity, helped maintain confidence in the financial sector.
These government and central bank actions contributed to continued access to funding and deposit growth.

Banks could handle an increase in mortgage defaults; the direct impact on asset quality has been limited so far.
Factors mitigating risks of a large increase in bank losses from mortgage lending:
- Interest rates on new and existing mortgages fell substantially from mid 2008, easing household loan servicing.
- A portion of high loan-to-valuation ratio mortgages is insured, usually by third parties.
- The legal framework makes the homeowner liable for remaining debt after repossession by a bank.
- Only a small share of owner-occupied households belonged to the higher risk group with debt-service ratios over 30 percent of disposable income and loan-to-valuation ratios above 80 percent:
- For Australia this share was 7 ½ percent.
- For New Zealand the share was 3½ percent.

Balance-sheet indicators show corporate sectors in both Australia and New Zealand are sound; leverage has remained stable and broadly similar to other advanced countries.
Corporate profitability has improved considerably since the late 1990s and liquidity has increased.
As the global crisis unfolded, nonfinancial firm balance sheets weakened, including in Australia and New Zealand.
Market-based indicators, such as spreads on credit default swaps (CDS), suggest corporate solvency risks increased from 2008 through early 2009 but remained manageable.
A contingent claim analysis (CCA) based on April 2009 data estimated that Australian and New Zealand banks’ losses could amount to about 2 percent of total loans.
CDS spreads have narrowed substantially since April 2009, suggesting potential losses could be appreciably lower.

The IMF studies encourage bank supervisors in both countries to step up stress tests to assess bank resilience to deterioration in economic and financial conditions.
The Australian Prudential Regulation Authority and Reserve Bank of New Zealand should conduct more rigorous stress tests given the severity of the global crisis.
These stress tests should be conducted jointly across the two countries, given their interconnected banking systems.

IMF Survey: Australian, New Zealand Banks Remain Sound During Global Crisis — By Patrizia Tumbarello, January 22, 2010