Australian Banks Assure of Strong Buffer Against Global Financial Turmoil

The four largest Australian banks have a combined $25.9 billion direct loans to European nations. Since it comprises only 1 per cent of their combined loan book of $1.8 trillion, the banks have a strong buffer against the ongoing global market turmoil caused by the eurozone debt crisis.

Actually the direct loan exposure of the Commonwealth, ANZ, Westpac and National Australia Bank is less than $700 million to the five European nations now collectively known as PIIGS - Portugal, Italy, Ireland, Greece and Spain.

Despite a plan by European finance officials to put in place a rescue plan within five to six weeks, which includes a 50 per cent write-down of Greek debt and quadrupling of the European bailout fund, investors doubt if the moves could delay a looming second round of global recession.

The strong position of the Australian banks reflect the optimism expressed on Monday by Australian Treasurer Wayne Swan that while the country would be affected by developments in Europe and the U.S., it could ride out the new global economic storm.

To further strengthen Australian financial institutions, the Australian Prudential Regulation Authority (APRA) is pushing for a "living will" for the country's six largest banks. The target of the measures is to have a guideline on how to break up the balance sheets of the banks if it would fail.

APRA is also studying if it would include smaller banks, credit unions and insurers in the asset recovery plan. The regulator's timetable is to have the living will ready by 2012 for the top six banks to minimise cost of bank failures on taxpayers and cut risks to the financial system.

Although the Swiss-based Financial Stability Board (FSB) in its review of Australia's banking industry found the sector weathered the financial crisis well, it sought more measures to reduce banks' reliance on wholesale funding.

"The resilience of the system largely reflected the resilience of the economy at large," The Sydney Morning Herald quoted the FSB's assessment.

The minimal exposure of Australian banks to European debts would have little impact on their balance sheets, while for European banks a Greek default would force them to write down the value of their Greek bond holdings and lead to billions of dollars in losses.

"A disorderly default on government debt and withdrawal from the euro (by Greece) would leave a massive recapitalisation requirement even before the huge increase in private sector foreign currency loan impairments was factored in," The Sydney Morning Herald quoted a Deutsche Bank report.

"Australian banks yet again demonstrate good risk management and good geographic luck in avoiding massive loan exposures to troubled European economies, particularly the PIIGS," Morningstar analyst David Walker wrote.