Australia's Banks Sturdy, Closely Connected

Four major banks dominate the financial system

Oversight and supervision of risks is effective

Reforms needed to improve supervision of banks’ liquidity risk management, stress testing

Australia is a member of the Group of Twenty advanced and emerging economies and among the world’s largest commodities exporters. Australia takes over the rotating presidency of the Group of Twenty in 2014.

The country was one of the few advanced economies to avoid a recession during the global crisis, and stress tests by the government and the IMF show the banking system is likely to withstand severe shocks.

The IMF said the financial system is sound, resilient and well managed.

“The government’s timely response to the fallout from the global crisis, their prudent economic management, and strong supervision of the financial sector has kept Australia on the dwindling list of AAA rated countries,” said Cheng Hoon Lim, a division chief in the IMF’s Monetary and Capital Markets Department and head of the team that conducted the assessment.

The IMF assessment said the global outlook remains uncertain and Australia’s financial sector is not immune to volatile global markets. The country’s financial system has assets more than three times the size of GDP.

Main risks

Four large banks dominate Australia’s financial sector, which have similar business models and rely on wholesale funding, such as interbank loans and covered bonds. Residential mortgages are banks’ single largest asset, and a combination of high household debt and elevated house prices increases the risk in this portfolio. Other potential risks identified by the IMF are:

• Banks rely on funding from outside the country, and with the crisis in Europe and the global economy suffering, these funding sources are volatile.

• Four major banks dominate the banking system, and they share many similarities that can be a cause of risk spreading from one to another in the event of a crisis.

In the wake of the crisis, the IMF has strengthened its surveillance of countries’ financial systems. Since 1999 the IMF has monitored countries’ financial sectors on a voluntary basis through a joint review process with the World Bank called the Financial Sector Assessment Program.

Australia is one of the major 25 financial sectors that...