Ahead of the final report of David Murray's Financial System Inquiry due this month, APRA has warned that Australian banks are ill-prepared to recover from a financial crisis.
Speaking at the ABF Randstad Leaders Lecture Series, APRA’s chairman revealed the results of the regulator’s industry-wide stress test of Australian banks' mortgage books.
“If we draw one conclusion from the stress test this year, it’s that there remains more to do to be able to confidently deliver strength in adversity,” APRA Chairman, Wayne Byres said.
As banks have been riding the property market wave, both the Murray Inquiry and APRA have openly expressed concerns over what would happen when the housing market eventually corrects and property prices fall.
In his speech, Byres said, “The low risk nature of Australian housing portfolios has traditionally provided ballast for Australian banks. But that does not mean that will always be the case.”
The banks have argued that they have not only passed through the global financial crisis intact but have increased capital buffers since then. However, Byres disagrees, saying they are “virtually unchanged” from a decade ago.
“Put simply, much of the strengthening of capital ratios relative to a decade ago is less the product of substantial growth in capital and more the product of the increasing proportion of housing loans within loan portfolios. In short, banks have de-risked rather than deleveraged.”
It wasn’t all bad news for the banks, with Byres admitting that the Australian banking industry appears “reasonably resilient” to the immediate impacts of a severe downturn impact the housing market. However, it is the bank’s recovery plans which have left him concerned.
“But a note of caution is also needed - this comes with a potentially significant capital cost and with question marks over the ease of the recovery. The latter aspect is just as important as the former: if the system doesn’t have sufficient resilience to quickly bounce back from shocks, it risks compounding the shocks being experienced,” he said.
“Our conclusion is, therefore, that there is scope to further improve the resilience of the system.”