Finance news

Australian banks are “weathering the storm'' caused by the slump in global credit markets, remain profitable and have “sound'' capital reserves, central bank Governor Glenn Stevens said.

“There is very little direct exposure to the U.S. subprime problems,'' Stevens said in a speech to a Euromoney conference in Sydney today. “The main reason for the resilience is many years of robust economic growth, sound regulatory foundations and prudent risk management.''

The strength of the financial system may give the Reserve Bank of Australia scope to increase interest rates again if inflation running at the fastest pace since 1991 doesn't cool. The bank has raised rates four times since August to the highest in almost 12 years even as policy makers in the U.S., Canada and the U.K. cut borrowing costs to cushion their economies from the global slowdown.

“The Reserve Bank has tended to be toward the more optimistic end of the range in their views on the global economy,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's biggest mortgage lender.

“The strength of the domestic economy and the near-term inflationary trajectory still favor a lift in the official cash rate target to 7.5 percent by mid year,'' Blythe said.

Stevens conceded the “local financial community has certainly been affected by the global turmoil.'' National Australia Bank Ltd. and Commonwealth Bank, the country's two largest lenders, extended declines in Sydney share trading today. They have A$34 billion ($31 billion) in market value this year.

Bank Stocks

The 49-member S&P/ASX 200 Finance Index has slumped 27 percent the past six months as banks including National Australia and Commonwealth revealed they've loaned money to companies caught in the global credit squeeze.

The Australian dollar traded at 92.08 U.S. cents at 3:13 p.m. in Sydney from 92.08 cents immediately before Stevens' comments. The yield on the two-year bond fell 3 basis points, or 0.03 percentage point, to 6.16 percent.

Australian companies including Centro Properties Group, Allco Finance Group Ltd. and ABC Learning Centres Ltd., all of whom expanded overseas with debt from Australian banks, have lost most of their market value since the collapse of the U.S. subprime mortgage market.

Stevens said today the central bank has increased liquidity to Australian financial institutions coping with the global credit squeeze “substantially, as required.''

Home Loans

“It's naive to think Australian banks aren't affected,'' said Brian Johnson, a banking analyst at JPMorgan Chase & Co. in Sydney. “While they don't do big subprime lending, we remain a country of debtors in which housing borrowings are so much bigger than retail deposits.''

Stevens said the cost to banks of raising funds has moved independently of the overnight rate.

The central bank increased the benchmark interest rate by a quarter point to 7.25 percent on March 4 500 fast cash. Policy makers next review the rate again on April 1.

“This speech is in line with our view that rates are on hold as the Reserve Bank watches the impact of the global credit crunch,'' said Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney. Futures contracts show most traders expect the bank will leave rates unchanged next week.

Australia's five largest banks have added an average of 77 basis points, or 0.77 percentage point, to their home-loan interest rates this year, more than the 50 basis points added by the Reserve Bank to the overnight cash rate target in that period.

Lending Standards

The nation's banks have tightened lending standards in the face of a global financial system that is under “more strain'' than at any time since the early 1990s, the Reserve Bank said in its half-yearly Financial Stability Review published today.

Stevens said it's not realistic to expect local banks to move lending rates in line with the official rate in the recent environment. “In setting the cash rate, the Reserve Bank has taken account of these shifting relationships,'' he said.

The governor also noted the past nine months have “been a very challenging time in international financial markets.''

The U.S. Federal Reserve has responded to the freeze in credit markets by cutting its benchmark interest rate at the fastest pace in two decades to 2.25 percent.

In an emergency action earlier this month, the Fed also reduced the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan to help finance the purchase of Bear Stearns Cos. after a run on that securities dealer.

The Fed's move isn't a “bailout'' as “shareholders and managers of Bear Stearns have lost a great deal of money, but the system will be stabilized,'' Stevens said today.

Supervision

The turmoil in financial markets has sparked increasing discussions between central banks on how markets are furnished with liquidity, “including across borders, which may be needed given the globalized nature of markets,'' Stevens said.

In addition, “there will need to be a focus in the supervisory community and the banks themselves on liquidity management,'' he said.

Prime Minister Kevin Rudd echoed Stevens' comments. “The current crisis has highlighted the importance of disclosure and transparency'' and suggests the need for “better rules,'' Rudd said in Melbourne before embarking trip to Washington, New York, Brussels, London and Beijing in the next three weeks. The Treasury, Reserve Bank and regulators have been discussing these matters with their global counterparts, Rudd added.

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