Australian banks are well positioned to meet the challenges from a period of economic transition in the coming 12 to 18 months, as the investment boom in the resources sector moderates and the decline in the terms of trade weighs on national income, says a new Moody's Investors Service report."We believe that the banks can manage the transition with little risk of disruption to their credit standing, because of their improved balance sheet strength, funding profiles and financial flexibility," said Patrick Winsbury, a Moody's senior vice president."Headline economic growth should remain sound, in the mid 2 per cent range for all of 2013, and again in 2014, although somewhat below the long-term trend of 3 per cent. "While housing activity has picked up and there are some tentative signs of an associated wealth effect in [the] improving discretionary retail sales, pockets of weakness in the labour market will nevertheless remain a feature.The report noted that the banks' solid capitalisation levels have allowed for the early implementation of Basel III capital requirements in Australia in 2013, and this has underpinned their strong performance in Moody's stress tests.And, while the banks have increased dividends, they have done so on the back of their strong profits and slow growth in risk-weighted assets (RWA). In this context, Moody's expects the banks could readily revert to a strategy of capital preservation, if needed.There are also signs that the low credit-growth environment is lifting competition in lending, but the impact on profit is being somewhat offset by an easing of competition in deposit gathering. Low interest rates are facilitating mortgage pre-payments, which are, in turn, offsetting new credit commitments, Moody's said. Corporate debt ratios remain near historic lows.Moody's also pointed to improvements by the banks in their funding and liquidity profiles since the global financial crisis, although there is a limit.  While the larger banks are unlikely to be able to reduce their reliance on wholesale funding much further, the need to meet the Basel III liquidity coverage ratio (LCR) requirement in January 2015 will push them to improve their funding stability, the agency suggested. "The risk of a significant rebound in the banks' wholesale funding needs is also limited by our expectation that credit growth will remain moderate," the report stated.Moody's rates 12 of Australia's 21 domestic banks, and four of the eight foreign bank subsidiaries operating in the country. At 30 September 2013, the 16 banks it rates accounted for 94 per cent of all banking system loans.In comparison, credit unions and building societies have small market shares relative to the banking sector, accounting for just 4.5 per cent of the financial system's housing loans at 30 June 2013, according to Moody's.