Australian, New Zealand Banks Remain Sound During Global Crisis

• Author: Patrizia Tumbarello
• Position: IMF Asia and Pacific Department

But the studies encouraged bank supervisors in both countries to step up stress tests to assess how well banks would perform in the event of a further deterioration of economic and financial conditions.

Banks in both countries were healthy at the outset of the financial turmoil-which began in mid-2007 in the U.S. mortgage market and quickly spread to other sectors and other advanced economies-and the institutions continue to be resilient to the global crisis. Economic downturns in Australia and New Zealand contributed to an increase in impaired assets, but banks’ capital ratios have remained well above regulatory requirements.

Effects of the global turmoil

The direct impact of the financial crisis on the quality of assets on bank books has been limited so far, especially for large banks. This reflects the small exposure these banks had to U.S. subprime mortgage loans and collateralized debt obligations (CDOs). Conservative capital adequacy rules imposed by the banking regulatory authorities and regular stress testing of banks also helped limit risks.

The large banks are less leveraged than banks in comparable countries and financial soundness indicators have remained strong. The international financial turbulence reduced profitability, but major banks retained their AA credit ratings and the major banking groups were able to raise private equity capital.

Banks did have sizable external debt obligations and there was a risk that this debt would become more difficult to roll over. Wholesale funding accounts for about 50 percent of total funding at Australian banks, and access to offshore wholesale markets was disrupted by the collapse of the Wall Street investment firm Lehman Brothers in September 2008. The four large banks in New Zealand, which are wholly owned subsidiaries of the four large Australian banks, similarly rely on funding from offshore markets.

But the establishment of deposit and wholesale funding guarantees by the Australian and New Zealand governments in October 2008 and central bank actions in both countries to provide sufficient liquidity helped maintain confidence in the financial sector. Despite the most intense turmoil in international markets in decades, banks in both countries generally maintained access to capital market funding (both domestic and offshore) and experienced strong growth...