Fresh fears raised over strength of Aussie banks

Recent comments by the central bank together with a new Moody’s report point to strong headwinds for Australian banks.

Due to the unique nature of their liabilities banks are subject to a ‘special fragility’, according to Dr Luci Ellis, head of financial stability at the RBA.

Speaking at the Sydney Banking and Financial Stability Conference, hosted by the University of Sydney this week, Dr Ellis said the banks’ offer of ‘value at par and on demand’ places them in a permanently precarious position because, in the event of a run on demand, the assets they hold to back their deposits cannot all be realised immediately. 

Even those that could be liquidated, she said, would require the acceptance of a ‘significant fire-sale’ price discount.

Another of the challenges banks face is that a run can occur even when the bank is sound, Dr Ellis added. 

“Certainly a bank is more likely to fail if there are doubts about the quality of its assets, but that isn't even necessary,” she said.

“All that is required is for depositors to believe that other depositors will run on the bank; then they better be the ones to get their money out first.” 

Set against these comments, a new Moody's Investors Service report has found that Australian banks’ sensitivity to shocks is on the increase.

Due to increasing household leverage and persistently low interest rates they are facing ‘a growing number of headwinds’, Moody’s said.

Over time these headwinds could put pressure on the credit profiles of Australia's major banks, added vice president and senior analyst Frank Mirenzi, particularly in the context of their very high ratings. 

“Whilst solvency and liquidity buffers have improved in recent years, the path of future balance sheet strengthening is likely to be slower than in previous years — at a time when risks continue to rise,” he said.

These findings are contained in Australian Banks: Rising Leverage and Cyclical Challenges Pose Risks, Moody’s just-released report on Australian banks.

The ratings agency said that the weak state of the operating environment is reflected in Australia's accommodative monetary policy, characterized by a historical low in the RBA policy rate.

The headwinds, Moody’s said, are likely to persist over the next 12 months.

[Related: Banks now 'unquestionably strong', says APRA]

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