World Economy

IMF Points at Potential Weaknesses of Australian Banks

IMF Points at Potential  Weaknesses of Australian Banks
IMF Points at Potential  Weaknesses of Australian Banks

The International Monetary Fund has provided a ringing endorsement of the financial system inquiry’s calls for higher bank capital, declaring the recommendation that banks carry capital making them “unquestionably strong” should be implemented as a priority and suggesting capital can be built without costs to the Australian economy.

In a report on Australia after a visit by its officials, the IMF described Australia’s banks as highly rated and profitable but also pointed to potential weaknesses, including the domination of the big four banks that operate “similar business models, which rely significantly on wholesale external borrowing”, Business Today reported.

FSI chairman David Murray said reliance on offshore capital markets was a key risk for the financial system and capital levels must be kept in the top quartile of global banks to ensure funding markets remain open in a crisis.

“While international comparisons are fraught with difficulty, Australian banks do not appear to have particularly high capital ratios and the global trend is upwards,” the IMF said.

“Putting a floor of 25 to 30% on mortgage risk weights [as recommended by the inquiry] would help but capital ratios would also need to rise substantially.”

 Mortgage Risks

UBS analyst Jonathan Mott said this week in a note to clients an announcement by the Australian Prudential Regulation Authority increasing mortgage risk weights was imminent.

The IMF said the rise in bank capital ratios since the crisis “largely reflects a shift towards mortgages and a lowering of risk weights” so “implementing the recommendations of the financial system inquiry should be a priority”. Stress tests conducted by APRA last year showed a severe downturn: “Bank capital would have to be substantially higher to ensure a fully-functioning system”, the IMF said. 

Given the high profitability of the banks, higher ratios “can be achieved at little, if any, macroeconomic cost, especially if done gradually, and will make the financial system, the budget and the economy stronger”, the IMF added.

It also warned Australia that without more reforms, economic growth is likely to remain below potential, resulting in income growth significantly slower than the past two decades.

 SA Growth to Remain Weak

The IMF said South Africa’s growth prospects will improve slightly in the coming year, but remain too weak to curb chronic unemployment in the continent’s most advanced economy, AFP said.

“The growth and jobs outlook remains lackluster, with growth projected at 2% in 2015-16” - up from 1.5% in 2014–the fund said in its report after a routine assessment visit to South Africa.

Power outages risk being the biggest brake on the country’s economic growth. “As the electricity crisis has deepened, only a muted recovery to 2% growth is expected in 2015-16 mainly due to the anticipation of fewer days lost to strikes.”

“Severe electricity shortages, the worst since 2008, have become the greatest obstacle to growth, reducing economic activity, sapping confidence, and discouraging investment,” said the fund.

Joblessness rate hit 26.4% in the first quarter of 2015, the highest level in 11 years. IMF forecasts that unemployment will remain above the 25% mark in the coming year, unless government rolls out major policy changes.

Inflation, which hit a four-year low in February of 3.9% on the back of low oil prices, “is projected to rebound to 6.1% in 2016,” said the IMF.

The IMF also cautioned South Africa over its new immigration laws, which it says could hinder the country’s access to much needed skilled expatriate personnel.

“Some recent measures–for example, new regulation for visas for certain skilled workers and restrictions on temporary employment - risk depressing growth and job creation,” said the IMF.

The IMF also said that South Africa continued to underperform peer emerging markets.