Banks could withstand mortgage meltdown

Australia’s major banks are strong enough to withstand a severe downturn in the Australian mortgage market, according to a recent report by global ratings agency Fitch Ratings. But their reliance on offshore wholesale debt markets for funding remains a key vulnerability according to the report.

The 150 per cent surge in property prices in the decade to 2008 had helped push Australia’s household debt to disposable income ratio to 159 per cent in mid-2010, which is a higher level than the US, UK and Spain at the peak of their housing cycles, according to Fitch

Still, Fitch says a downturn in Australia’s mortgage market is not imminent and the big four banks and main lenders mortgage insurers have “substantial capacity” to manage a deterioration in the mortgage market.

The banks’ management of their loan books and asset quality is critical given the Australian banking system’s reliance on wholesale markets for funding, Fitch said.

Fitch analysed the probability of default under mild, moderate and severe scenarios, which assumed house prices would drop by 20 per cent, 30 per cent and 40 per cent respectively.

The probability of default was set at 2.5 per cent, 6.0 per cent and 8.0 per cent respectively, although Fitch admitted its analysis did not account for borrowers’ ability to service their loans, nor the impact of the floods in eastern states.

What this really means is that our banking system is much healthier than many of those overseas and should easily be able to cope with the ravages of the recent floods

Between 30,000 and 40,000 houses were damaged by the floods in Queensland and the flow-on effects will hit Australian residential mortgage backed securities (RMBS), the agency said.

Remember this report was not suggesting that our property markets will fall, it was just tesing our banking system’s resilience under a number of different scenarios.


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