RBA report highlights credit risks

A new report by the Reserve Bank of Australia has warned that rising unemployment and household indebtedness could have a severe impact on Australian borrowers.

Released yesterday, the research discussion paper by David Rodgers entitled Credit Losses at Australian Banks: 1980–2013 looked at the Australian credit loss experience historically in two episodes: the losses around the early 1990s recession and the losses during and after the global financial crisis.

While the report found that the macroeconomic shocks experienced by the household sector during the past three decades have been small relative to the home lending standards over the period, it warned that future macroeconomic shocks may have a larger impact on households.

“There have been, for example, no large nationwide falls in house prices during recent decades,” the report noted.

“In addition, a rise in unemployment on par with that in the early 1990s could be expected to have a more severe influence on household credit losses, given the large rise in household indebtedness over the intervening period.

“A corollary of this rise in household indebtedness is the greater share of banks’ lending now made up by housing and personal lending.

“These considerations suggest that any weakening in lending standards in these areas could have a larger systemic impact than in the past.”

Meanwhile, the report found that business lending has been the primary driver of elevated credit losses by Australian banks.

Above-average losses during the recession of the early 1990s and the GFC were on lending to businesses, while credit losses on housing loans during and after the global financial crisis were minimal in Australia, according to the report.

A closer look at the portfolio composition of Australian lenders indicated that conditions in the business sector, rather than those in the household sector, drove credit losses in Australia during the period studied.

“The data also indicate that the very worst credit loss outcomes – including those that led to the failure of several state government-owned banks in the early 1990s – were driven by poor lending standards,” the report said.

The report’s author, David Rodgers, concluded that the historical experience of credit losses at Australian banks described in the paper should help to guide overall understanding of the credit risk they currently face.

“It supports a continued focus on the analysis of the financial health of the business sector,” he said.

“As another example, credit loss measures appear to peak before asset performance measures, potentially providing an early signal of future improvement in financial system stability.”

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