Call to rate lenders on asset quality, not liabilities

Australian lenders have been repaying offshore wholesale debt quickly. Photo / Getty Images

Bank asset quality is more important than access to funding when assessing a lender's financial strength, says Reserve Bank of Australia Assistant Governor Guy Debelle.

Proposed changes by Standard & Poor's to the way it rates lenders worldwide are evidence of a heavy emphasis on funding in the wake of the global credit crisis which followed the collapse of Lehman Brothers in September 2008, Debelle said to a banking conference in Sydney yesterday. His speech didn't discuss monetary policy.

"The pendulum has swung too far in focusing on liabilities," Debelle said. "Asset quality should still be paramount and should be given a far larger weight than liabilities in assessing financial strength."

Moody's Investors Service last month cited banks' reliance on funding themselves through bond markets for downgrading Australia's four biggest lenders by one level to Aa2.

Global regulators, led by the Basel Committee on Banking Supervision, want to prevent a repeat of the credit freeze by setting higher capital requirements and a minimum amount of stable funds that banks will have to use to finance different types of lending.

S&P plans to publish its final criteria for assessing lenders' ratings before changing its debt grades for banks in the last three months of this year, according to an April 20 report.

The proposed rating process would focus more on economic risk and how much capital banks hold, while the impact of government support for a lender would be reassessed, the risk assessor said in January.

The credit crunch forced Governments worldwide to guarantee bank debt and financial firms to raise US$1.65 trillion ($2 trillion) of capital to replenish balance sheets.

Australia's biggest banks - Commonwealth Bank of Australia, Westpac, ANZ and National Australia Bank - remained largely profitable throughout the crisis, without government bailouts.

Australian lenders, heavy users of offshore funding in 2009, have been repaying offshore wholesale debt faster than they've been offering new bonds in three of the past four quarters, according to Debelle. "In net terms, the banks have been repaying their foreign liabilities."

Further, lenders hedge bond sales in other currencies back to Australian dollars, meaning the RBA can address any liquidity problems, he says.

Australian banks' balance sheets are benefiting from a surge in deposits as companies and consumers boost savings, while home buyers have also become more conservative.

Borrowing for mortgages grew by 6.4 per cent in April from the period a year earlier, the least since the central bank figures were first reported in 1977. The nation's household savings ratio climbed to 11.5 per cent in the three months through March.

- Bloomberg