Australia’s banks remain well placed to deal with the economic shocks from the Covid pandemic, the reserve bank has found, even though its effects were likely to be worse than the global financial crisis.
The RBA’s outlook was upbeat, although unemployment and wage growth remain problematic. The bank has said it is concerned about the possibility of lower wage growth rates in new collective agreements placing further downward pressure on wages.
In its final meeting of the year, the RBA noted a stronger than expected recovery in the labour market, although people continued to work fewer hours than they wanted, and unemployment remained high.
The RBA recorded the slowest wages growth in two decades, with the wage price index slowing “to 0.1% in the September quarter to be just 1.4% in year-ended terms”.
Employees also face the possibility of wage reductions under the Coalition’s industrial relations bill.
“The slowdown in award wages growth in the September quarter had been even more pronounced than in individual agreements, in part reflecting deferred increases for many awards,” the minutes from the RBA meeting reported.
“Members also observed that if new collective agreements (mostly enterprise bargaining agreements) were established at lower rates of growth than expiring agreements, this would place further downward pressure on wages growth. It was noted that a substantial tightening in the labour market would be required to lift wages growth and inflation outcomes over the medium term.”
Australia’s banking system had a slightly rosier outlook.
Jonathan Kearns, the head of financial stability at the reserve bank, gave Australia’s banking system a health check in a virtual address to the Australasian finance and banking conference on Tuesday.
Kearns said the resilience of banks in the second global recession in little more than a decade was “the result of the wholesale reform of bank regulations that followed the GFC and unprecedented policy actions taken this year by central banks and fiscal authorities”.
That was a nod to the RBA’s $100bn bond buying scheme, designed to keep cash flowing throughout the economy, and record low interest rates as the central bank pulled on all available levers during the pandemic.
For the most part, Kearns said, Australian banks had weathered the crisis. Low interest rates meant banks could expect lower profits, but the RBA expected banks would remain profitable, with customers who had asked for loan deferrals already resuming payments.
“At the peak, 10% of housing loans and 17% of small and medium business loans had deferred payments,” Kearns said. “With the economic contraction less severe than initially feared, and the recovery under way, many borrowers have resumed loan repayments and now only a little over 3% of both housing and business loans have repayment deferrals.”
But Kearns did warn banks to watch their loan books. “It is important that loan repayment deferrals are temporary and not used to hide problem loans,” he said.
To that end, the banking regulator Apra has published information on loan referrals by institution, to give a better idea of the shape of each bank’s loan book and set an end date for the effectively “no questions asked” deferral policy.
From 1 April, banks “will have to revert to holding substantially more capital against loans that are deferred or fall behind on repayments, in the ball-park of five times more capital”.
Kearns painted an optimistic picture of how the banks would handle the coming economic challenges.
“There is no doubt that the Covid-19 pandemic will be a test of the banks,” he said. “In Australia, the economic shock is much larger than it was in the GFC and for many decades before that.
“But Australian banks are better prepared than they were prior to the GFC. Their much higher liquid asset holdings helped earlier this yer. Banks are well capitalised. Importantly, they have large buffers which are there to be used, no preserved, and will enable them to continue lending and supporting their customers, and so the economic recovery.”