Australia cenbank says worst of global crisis over

Tue Oct 27, 2009 11:59pm GMT

SYDNEY Oct 28 (Reuters) - A top Australian central banker on Wednesday said he was cautiously optimistic the worst of the global financial crisis had past and underlined the relative strength of the domestic banking system and economy in general.

In a speech at a financial services conference, Reserve Bank of Australia (RBA) Assistant Governor Malcolm Edey said there were still dangers ahead but pointed to rising share prices of banks and narrowing risk spreads as reasons for optimism. "The good news is that things are now improving, and have been for some months," said Edey, who heads the central bank's financial system division.

"The world economy is returning to growth, confidence has picked up and, over the last six months or so, financial market conditions have improved significantly on a number of fronts," said Edey.

The domestic banking system never suffered as much as those in the United States and UK, thanks in part to tighter lending standards and a more resilient home economy, he added.

"The past year has been an extremely challenging time, but Australia's financial system, like the economy itself, has come through it in better shape than most," said Edey.

That resilience was one reason the central bank raised interest rates this month, the first of the G20 nations to do so since the global credit crisis first began.

Edey said return on equity for Australia's major banks had fallen only modestly to around 13 percent in the latest half-year. That was lower than it had been for a few years, but still a very strong performance in the circumstances, he added.

The cost of short-term wholesale funding for Australian banks had fallen markedly and, at longer terms, the availability and cost of unguaranteed funding had improved, he said.

Edey noted the proportion of banks' long-term issuance not guaranteed by the Australian government had risen from next to nothing at the end of last year to around 75 percent in the latest month.

There had been a more significant deterioration in loan quality in the business portfolio of local banks, particularly for impairments on commercial property loans, he said.

"This will remain an area to watch in the period ahead," he added.

Nevertheless, banks' aggregate impairment rates were still low in comparison to other countries, and only a fraction of the level they had reached here in the early 1990s.

The banks are well capitalised, and had strengthened their balance sheets further over the past year with significant additional raisings, said Edey.

(Reporting by Wayne Cole; Editing by )

((wayne.cole@reuters.com ; +61 2 9373 1813; Reuters Messaging: wayne.cole.reuters.com@reuters.net))

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