Australian Banks Overview
There has been little to complain about for the Australian banks in the recent past. The last decade has been very successful for the Australian banking industry. There has been a friendly environment though competition has been heightened. Financing has been strong and profitability has been great. One concern however is the drastic growth of household credit.
The Effects of Superannuation
Superannuation is an organizational pension program created by companies for their employees, often called company pension plans. The growth of superannuation as a financial tool has had several effects.
- The wealth-management sector has seen a growth spurt.
- Insurance and funds-management companies have acquired major banks and implemented diversification.
- Securitisation of residential mortgages and other types of loans has been used to produce capital market instruments.
- Offshore borrowing has been used to replace household funds flowing into non-deposit products.
Is Recent Credit Growth Sustainable?
Private sector credit growth has consistently surpassed nominal GDP growth over a long period. Since the early 2000s, household debt and debt service costs have risen significantly. This by itself is not a cause for concern; however there are many other factors to be considered.
- Growth in debt-to-income ratios reflects a response to lower interest rates and increased housing prices.
- Household debt in Australia appears to be high by international standards.
- Some households have high debt levels, though many of these are two income households, which provide a greater protection from a credit risk perspective.
- As many as 67 percent have no debt.
- Business credit has been repressed, which leaves room for growth in this sector.
The advantage of advanced information technology has greatly benefited large Australian banks. In global comparison, large Australian banks have been among the most profitable. This profitability is supported by healthy industry regulation and forthright accounting policies and practices and does not appear to reflect unnecessary risk-taking.
Australian Banks Area of Concern
One of the areas that do warrant some concern is in international regulations. As business is being conducted regularly now between countries, formal and informal arrangements must be made to improve the working relationships between the regulatory authorities. Australia and New Zealand are currently working to develop a seamless regulatory atmosphere while addressing the regulatory concerns of both countries. These concerns include:
- domestic depositors in multinational banks exposure from things like cross-border outsourcing of information systems
- depositor preference laws
- home-host cooperation in the supervision of branches and subsidiaries
- the physical location of assets
While an international standard to cross-border banking supervision would help, the need for banking regulation to consider national differences such as taxation, insolvency and corporations law, makes this a complex issue.
While Australian banks have experience much success and profitability with superannuation and international trade increasing, attention must be paid to the increased consumer debt and the areas of concern that international commerce presents. On the flip side, there is room for growth in business credit and the international commerce opens up new business opportunities as well.