Oct. 20 (Bloomberg) -- Australian banks have limited holdings of sovereign debt in nations most at risk in Europe, without being “entirely immune” from the turmoil, a Reserve Bank of Australia official said.
“Australian banks have only limited direct exposures to sovereign debt in the countries that are most at risk,” Assistant Governor Malcolm Edey said in prepared remarks for a speech in Sydney today. “So potential effects on Australian banks’ overall asset quality are not an issue.”
The European debt crisis has dimmed prospects for growth around the world including in Australia, the only developed economy to avoid the 2009 global recession. The Reserve Bank of Australia has indicated it has scope to reduce the benchmark interest rate from a developed-world high of 4.75 percent if needed as a slower domestic expansion eases inflation concern.
In his prepared remarks, Edey didn’t address the state of the Australian economy or monetary policy in the address.
Since the implosion of Lehman Brothers Holdings Inc. in 2008, the Australian banking system has bolstered its capacity to withstand international financial-market shocks, the RBA said in its half-yearly financial stability review last month.
“Australian banks have done a lot to strengthen their funding positions,” Edey said today. “They have increased their use of domestic deposits as a funding source, lengthened the average term of their wholesale funding, and correspondingly reduced their reliance on short-term wholesale debt. These things will help to make them more resilient to the uncertainties that are now affecting international credit markets.”
Speaking to the 2011 ISDA Annual Australia Conference, Edey also addressed pending regulatory changes in the aftermath of the 2008-09 global financial crisis.
The largest part of the nation’s over-the-counter derivatives market is single-currency interest-rate swaps, the bulk of which are denominated in Australian dollars, with notional principal amounts outstanding at around A$8 trillion for the banking system, he said.
“Where a market is systemically important to the Australian economy and financial system, this points to a case for the central counterparty that clears it to be subject to appropriate safeguards that control the propagation of risks to domestic participants,” Edey said. “This might be best achieved where the CCP is locally incorporated and subject to domestic regulation” and balanced against the case for an offshore approach, he said.
--Editors: Brendan Murray, Garfield Reynolds
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