The Australian economy, seen as more interdependent with the local banking sector than most other advanced economies, remains in good shape, according to Standard & Poor's latest Banking Industry Country Risk Assessment for Australia. The report assesses the near and medium term outlook for the domestic banking sector, against the background of the outlook for the Australian economy and several external factors. In a wide-ranging panel discussion in Sydney yesterday, examining factors affecting Australia's banking sector with a particular focus on the major banks, Standard & Poor's banking experts said they expected "solid economic growth will continue over the short-to-medium term."S&P's BICRA report for Australia forecasts relatively favourable conditions for the banking sector, if slightly below trend given a muted recovery in non-mining business investment.In the case of the majors, in particular, "given their continued ability to generate an adequate return on equity, we believe it unlikely that the dominant four major listed private sector banks will significantly increase their risk appetite over the next two years," the S&P report stated.Nevertheless, S&P said the banks remained overly exposed to external funding needs - as indeed does the whole Australian economy - and the focus on home mortgages and house prices could not go unremarked."While we expect house price growth in [Sydney and Melbourne] will continue over the next two years, we believe that it will be at a slower pace, which should arrest any further increase in risk of a disorderly unwind of property prices," said credit analyst Peter Sikora.Sikora forecast national average inflation-adjusted house price growth to slow to about four per cent over the next 12 months. "Net migration flow has reduced slightly, and supply of houses have increased," he added. The BICRA report also pointed to the conservative underwriting standards followed by Australian banks, saying "while residential mortgages form a significant portion of lending by the banking sector, use of subprime mortgages has been minimal. Nonperforming loan levels and credit losses remain at historically low levels - averaging no more than five basis points annually."We believe that use of securitisation and covered bonds is limited to vanilla products, and is aimed mainly at diversifying funding risks rather than shifting them."On S&P's numbers for capital adequacy in 2014, Australia's major banks were ranked in the middle of the pack, not the top quartile, as had consistently been argued by the Big Four, prior to their various capital raisings this year.Another factor currently running heavily in favour of Australia's banking sector is the "highly supportive" approach taken by the Australian government towards the systemically important banks. "We expect the government will provide timely financial support to ensure the stability of the financial system, if needed," S&P said.Further, at this point any move toward a "European style" senior bank debt bail-in has been minimal. "We also consider it unlikely that in the next two years the government would announce any changes ... to timely financial support to bail out systemically important banks, if needed."Over time, the Australian government may find