Banks keep taking risks on offshore market funding: Fitch

The Australian banking system’s reliance on wholesale funding from offshore markets remains a key risk to its stability in 2011, according to a new report.

The Fitch Ratings report on Australia’s big four banks found that while they appear well positioned for the year ahead, their reliance on continued access to offshore markets for funding could prove risky in the short to medium term.

Fitch’s Financial Institutions group director, Tim Roche, said that the main reason Australian banks retained access to wholesale funding markets during the global financial crisis (GFC) was their asset quality.

“Nevertheless, the banks remain reliant on offshore wholesale markets, reinforcing the importance of maintaining strong balance sheets to ensure continued access,” he said.

To address this reliance, the report noted that Australian banks had increased their focus on deposit-gathering, reduced reliance on short-term wholesale funding, increased duration in long-term wholesale portfolios and further diversified those portfolios.

Banks have also strengthened their capital and liquidity positions, both in response to the GFC and in the anticipation of the implementation of the Basel III liquidity changes.

Despite improved performance during 2010 largely due to significant reductions in impairment charges, the report found that in 2011 operating profit growth was likely to moderate due to subdued system credit growth.