The turmoil in global financial markets continues to have muted impact on the profits of Australian banks or the ability of homeowners to repay their loans, the Reserve Bank of Australia said.
The five largest banks reaped a total profit of $9.8 billion for the first half of the 2007/08 year, 12% more than the first half of the 2006/07 year, the banks said.
''The Australian financial system has coped better with the recent turmoil than many other financial systems,'' the RBA said today in its semi-annual Financial Stability Review. ''The banking system is soundly capitalised, it has only limited exposure to sub-prime related assets, and it continues to record strong profitability and has low levels of problem loans.''
''While the Australian financial system has not been completely insulated from developments abroad, it is weathering the current difficulties much better than many other financial systems,'' the central bank said.
Home loans healthy
Housing loans on the books remained in good shape in contrast to the weakness afflicting home loans in the US.
In a testament to the firm labour markets and income growth enjoyed by consumers, only 0.41% of outstanding home loans were in arrears, the RBA said, reflecting little change over the past year, and keeping the ratio of troubled loans low by historical and global standards.
The balance sheets of businesses have remained relatively healthy, buoyed by strong profit growth, the RBA said.
Using darker language than in its last semi-annual review of the Australian financial system in March, the central bank acknowledged, however, that ''some households are facing more difficult financial conditions than has been the case for some time,'' and were in the process of consolidating their finances.
The RBA's assessment for the global financial system is not nearly so bright.
''The problems in the global financial system are proving to be much more pervasive and costly than was anticipated by many observers a year ago,'' the RBA said. ''The recent difficulties have been compounded by a straining of the bond of trust between many banks and investors.''
''Given the difficult the difficulties with valuing structured credit products, many investors remain wary about the valuations being used by banks.''
The ''strain'' caused by the global credit crisis was expected to force local banks to write $3.1 billion in provisions, resulting from a ''small number of highly geared firms.''
Moreover, the weakness in US residential property, together with uncertainty in the financial system overall, ''have increased the risk of a damaging feedback loop running from the financial sector to the real economy and back to the financial sector.''
The ultimate impact of such a trend depends mostly on what happens to US property prices and the ability for global banks to retain investors' confidence, the RBA said.
Problem loans-to-total assets remain below the averages since the mid-1990s, when credit losses were unusually low.
The difficulties confronting the global financial markets won't be resolved until the opacity of the banks' assets is reduced and their capital levels increase, the RBA said.
Bailout applauded
In the review, the RBA welcomed US Treasury Secretary Henry Paulson's proposed $US700 billion ($840 billion) taxpayer funded bailout of the finance industry. The plan, unveiled last week, would allow the US government to buy the toxic debts amassed by banks in an attempt to restore order among them, needed to assure a functioning economy.
''Rebuilding confidence in the financial system is obviously important,'' the RBA said, referring to the initiative in the US.
However, the bailout legislation faces intense scrutiny from Democrats who are demanding restrictions on executive pay and help for struggling mortgage payers. Some Republicans have balked at the price tag too.
In a speech today, ANZ chief executive Mike Smith said the bailout plan was needed to prevent more bank failures and an economic recession.
"If Congress does not approve the plan I think I'll take up farming,'' he said.
More liquidity
The RBA's statement comes one day after the central bank teamed with the US Federal Reserve and three other central banks to create a $US30 billion swap line aimed at boosting US dollar liquidity among banks. A swap line is temporary reciprocal currency arrangement.
The Australian central bank also said yesterday it would take short-term deposits from local commercial banks in an effort to keep cash flowing through the system, allowing credit and financing activities to continue.
The global liquidity crunch has made banks reluctant to part with US dollars, slowing lending, and reinforcing the dry-up in liquidity.
The global credit crunch, sparked by a fall in asset values on complex types of debt tied to subprime mortgages, has entered its 14th month and appears to have reached a crisis phase in the US after the collapse of Lehman Brothers, and the US-funded bailout of insurance giant American International Group last week.
Last week the US Federal Reserve pumped an additional $US180 billion into the global banking system to relieve a US dollar shortage in Europe, bringing the total amount of liquidity injections to $US247 billion since the beginning of the crisis.
''Stabilisation of our financial system is an essential precondition for economic recovery,'' US Federal Reserve chairman Ben Bernanke testified to the Joint Economic Committee in Congress yesterday. ''I urge the Congress to act quickly to address the grave threats to financial stability that we currently face.''
The battle of the $US700 billion bailout in Congress and on Capitol Hill is playing out as the US presidential election enters its final days, with the topic of the economy dominating the issues discussed by Democratic candidate Barack Obama and Republican nominee John McCain.
czappone@fairfax.com.au
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