Standard & Poor's has downgraded its assessment of the risk profile of Australia's banking industry, but has elected not to lower the credit ratings of individual banks.The global ratings agency believes developments in the past two years in the sector highlight "some weaknesses" in regulation and the conduct, governance and risk appetite of local banks."Consequently, we no longer assess the Australian banking system's institutional framework and competitive dynamics to be very low risk," S&P said."Out of about 90 countries in which we rate banks globally, we now assess institutional framework as being very low risk for only three banking systems: Canada, Hong Kong and Singapore."S&P now ranks the local banking system as "low risk", which is the second highest rating on its six-point scale for measuring banking industry country risk.The agency's revised commentary on the standard of banking regulation is a subtle, though meaningful shift from the views expressed in November last year by the local head of financial institutions ratings, Sharad Jain.Jain told the AFR at the time that bank regulation in Australia was "of a very high quality" and "as good as anywhere else globally".Evidence presented to the Hayne royal commission appears to have modified the agency's view. In its latest commentary, the agency said that industry risks faced by Australian banks were "marginally greater" than those reflected in its previous assessments."Although the revisions have not resulted in us lowering bank ratings, they have eroded the cushion for further adverse developments within the current rating tolerances," S&P said."Furthermore, this has also limited the upside to the ratings due to any system-wide improvements."The agency said that it did not consider that industry risks had heightened in recent times and expected banks and regulators to be "more conservative" in managing governance and risk appetites in response to the hearings of the Hayne royal commission.However, Australian banks would for some time remain exposed to risks stemming from rapid growth in house prices and private sector debt."We consider that these imbalances expose the banks in Australia to a scenario of a sharp correction in property prices, and its severe consequences," the agency said."Nevertheless, we consider that the probability of such a scenario remains low and loan losses in the next two years are likely to remain very low by historical and international standards." S&P said there was a one-in-three chance that it would change its assessment of the federal government's attitude towards the sector from the current rating of "highly supportive" to "supportive"."We note that Australia's progress so far toward a European style framework for statutory bail-in of senior debt has been minimal," S&P said."Nevertheless, we believe that in an increasingly integrated global economy and financial markets, the Australian government may find it difficult to continue to withstand global moves toward more explicit bank resolution frameworks that envisage statutory bail-in of senior debt."The findings of S&P's review of Australian banking industry risks came only hours before Westpac said it was planning a new subordinated debt issue.Westpac's institutional banking arm said it was