RBA Governor’s positive view

Despite the global instability of financial markets over the past nine months and the ensuing process of assessing and disclosing losses, finding new capital and the difficulty of de-leveraging, Australia is considered well placed to ride out the current credit crisis.

This was the view of Glenn Stevens, the governor of the Reserve Bank of Australia (RBA), who said Australia is “weathering the storm well”.

Speaking at the Euromoney Australian Financial Markets Innovation Congress conference in Sydney yesterday, Stevens said profitability remains generally very strong and capital sound for Australia’s financial system.

He confirmed there was very little direct exposure to the US’s sub-prime problems and attributed the strength of the local market to many years of robust economic growth, sound regulatory foundations and prudent risk management.

Stevens identified the search for yield as one of the key catalysts for the current credit crunch on world markets.

“[The search for yield] saw end investors consciously begin to accept more risk in order to find the returns they were seeking. Additionally, the easy availability of credit and a benign macroeconomic environment led to an increase in the use of leverage to increase returns further.”

While he would not predict when he thought investor confidence would return to the financial market, he said the RBA had increasingly identified “good quality assets” available in the marketplace at prices that would, in normal times, be “very attractive” to investors.

“At some point, investors who are currently on the sidelines will need to summon enough confidence to take-up the opportunities for profitable exposure to risk. It is impossible to say when this will occur, but we can perhaps outline what the pre-conditions are,” he said.

“Investors will want a reasonable level of confidence that the bulk of the losses in the most important institutions have been accounted for and disclosed, that remaining ‘excess’ leverage has been essentially sorted out and that any remaining downside risks to asset quality stemming from slowing growth in the major countries are manageable and within the set of normal parameter variation that their portfolios can cope with.”