Soundness of Australian Banks Despite the Global Financial Turmoil - Research Paper Example

It is apparent that if a residential mortgage shock is joined with corporate losses, it will definitely harm banks. Local reports on Australian banks' performance indicated that a stress test is based on a worst-case scenario that would categorize other banks in the world in the same position (IMF 2010). In fact, it is argued that although such observations from the IMF stand to be correct, Australian banks were believed to obtain considerable aid from taxpayers and the Reserve Bank. Besides, it is argued that the Australian federal government helps banks in events of the crisis.

Overall, reports have indicated that the Australian banking system was resilient during the global financial crisis due to intensive supervision and regulation. Although the four major Australian banks capital ratios are placed below the global average for large banks, their conservative approaches in implementing the Base II framework indicate that their headline capital rations underestimate their capital strength. The major financial soundness indicators that these banks concentrated on include profitability, capital adequacy, asset quality and provisioning, and liquidity.

In particular, the Australian banks’ loss given default rates is arguably higher than those of several other countries. Additionally, higher risk weights were endorsed for certain residential mortgages. Moreover, reduced risk weights, which are allowed in the Basel II framework’s standardized approach, were introduced for retail lending (IMF 2010). Nevertheless, the risk-weighted assets numbers can not be comparable across nations. All in all, due to APRA’s conservative eligibility and deduction rules, Australian banks have a propensity of holding higher-quality capital.

According to RBA, in regard to Basel III requirements, banks will need to hold more and higher-quality capital. In light of this, the Australian banks can be argued to be in a better position to meet Basel II requirements due to their high quality of capital. In addition, Basel III introduces global liquidity standards. The objective of the liquidity coverage ratio is to ensure that banks have adequate high-quality liquid assets, which would enable them to survive financial crises (Australian Bankers’ association 2012). With regard to Australian banks, it is apparent they might find it difficult to have adequate government security as a result of fiscal restraint of recent governments (APRA annual report 2011). In this case, the banks may seek an alternative approach. Nevertheless, APRA and Reserve Bank of Australia have designed an alternative approach in order to meet new liquidity standards.

In regard to the vulnerability of Australian banks to shocks to residential mortgages, studies have indicated that residential mortgage lending, which comprises more than half of the major Australian banks’ loans, is less risky than corporate and another retail lending (APRA annual report 2011). In fact, the average risk weight for corporate lending has been cited to be four times that of residential mortgages.



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