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Global economy improving but caution needed on recovery - RBA

Wed Aug 19 17:38:09 EST 2009

SYDNEY, Aug 19 AAP - The Reserve Bank of Australia (RBA) says confidence in the global economy is improving, but it urged caution about recovery in a very challenging environment.

RBA assistant governor (financial system) Malcolm Edey said in a speech on Wednesday that a rebound in major equity markets since March, a lift in business and consumer confidence and a narrowing of credit market spreads indicated investors were becoming optimistic about the global economy.

"I have to give the usual caution that the situation is still very uncertain, and further setbacks are still possible," Dr Edey told the Financial System Developments in Australia Forum in Sydney.

"But, without making predictions, it's reasonable to say there are encouraging signs now that confidence is improving."

The Australian banking system had been "more resilient" than overseas counterparts during the crisis between September 2008 and March this year, as exemplified by their profitability, Dr Edey said.

"This is not always a popular point to make, but it's a great advantage during an economic downturn to have a banking system that remains profitable and is able to continue lending," he said.

"In 2008, the major banks in the US and Europe moved sharply into loss, though some have returned to profit this year.

"Australian banks, in contrast, have so far experienced only a small decline in their aggregate profitability, and they continue to earn a high rate of return on shareholders equity overall."

Dr Edey said local banks had stronger balance sheets heading into the crisis period around September 2008, with less exposure to high-risk assets than most of their overseas counterparts.

"This has been particularly evident in banks' lending for housing," he said.

"Although there has been some pick-up in housing loan arrears for Australian banks, the overall impairment rate remains very low.

"It currently stands at just over 0.6 per cent."

While the rate of impaired loans was expected to rise, it was significantly below comparable rates in other nations.

"In the United States, for example, the legacy of high-risk lending has contributed to a build-up in non-performing housing loans from less than one per cent of the bank's loan book to five per cent," he said.

"In the UK, the figure is around three per cent."

The international crisis has caused the main discomfort to Australian banks and other deposit-takers through the upheaval to wholesale credit markets, Dr Edey said.

"One important consequence of that has been an increase in banks' wholesale funding costs relative to the cash rate," he said.

"Heightened competition for deposits has also added to relative funding costs."

Beneficiaries of the federal government's deposit guarantee scheme introduced last November were smaller banks in Australia, Dr Edey said.

"If we look at the absolute levels of deposits ... it makes it clear that, proportionately, the regional and other smaller Australian banks experienced the largest growth in deposits in the period after the guarantee was announced," he said.

Governments around the world were working towards financial regulation where banks would need to have more capital and to take less risk, Dr Edey said.

"Regulators will be asking for higher liquidity resources," he said.

"They will be paying greater attention to the way risks interact across the financial system, in addition to the conventional focus on the safety of individual institutions."