By Eric Johnston
MIKE SMITH, the chief executive of ANZ Bank, said the health of the world's banking system hinges on the US Congress approving the $US700 billion ($835 billion) bail-out of Wall Street, warning of the potential meltdown of the US banking system if the package is overturned.
Even if the plan was approved, the former HSBC executive said global markets still faced a further 18 months of "extraordinary volatility" before recovering.
His comments came as the United States President, George Bush, appealed yesterday for the passage of the ambitious rescue package that would allow the US Government to buy hundreds of billion of dollars of mortgage-backed securities that are crippling bank balance sheets.
Under the plan, the Govern-ment would eventually sell the securities as markets recover.
Mr Smith said there was "no other choice" available to stabilise the US finance system.
"Congress has got to understand how important this is and how important this is to the US economy," he told an Australia-Israel Chamber of Commerce lunch in Sydney.
If the measures were not passed, "the banking system in the US would freeze and the knock-on effect through the rest of the world on the payments system would be huge".
Mr Bush appealed for support for the bail-out plan to avert financial meltdown and signalled he was willing to accept tougher controls over how the money was spent in order to get it through Congress.
He used a prime-time address to the nation to warn Americans that "a long and painful recession" could occur if Congress did not act quickly.
"Our entire economy is in danger," he said.
Mr Bush's comments came as the chairman of the US Federal Reserve, Ben Bernanke, and US Treasury Secretary, Henry Paulson, faced a second day of questioning before the House Financial Services Committee, repeating warnings of dire consequences if the rescue plan was not passed quickly.
As the stalemate continued in Washington over the rescue plan, the local sharemarket closed weaker after a directionless day. The benchmark ASX 200 closed down 54.5 points, or 1.1 per cent.
The problems paralysing US banks contrast with the local sector, with the Reserve Bank yesterday declaring the Australian financial system had coped better with the recent turmoil than many countries.
"The banking system is soundly capitalised, it has only limited exposure to subprime related assets, and it continues to record strong profitability and has low levels of problem loans," the RBA said in its semi-annual Financial Stability Review.
"While the Australian financial system has not been completely insulated from developments abroad, it is weathering the current difficulties much better than many other systems."
With the cost of wholesale funding rising, Mr Smith would not rule out passing on higher costs to consumers in the form of interest rate rises - although he said it was in "nobody's interest" to keep rates high.
He predicted credit rationing could emerge, with US housing- linked write-downs likely to top $US1.5 trillion.
"Banks are going to scramble for capital mostly to repair their balance sheets … that will reduce the amount of credit in the market".