It's not over yet says RBA

The global banking industry faces a couple of years of regulatory reform which will contribute to continuing uncertainty about the stability of the sector, a senior Reserve Bank officer said yesterday.

Head of the RBA's financial stability department, Luci Ellis, said: "The global financial system is facing a period of change. What happens over the next few years, at least, is highly uncertain."

Speaking at a conference at Victoria University, Ellis said credit conditions would most likely remain tight during that period. "Easier conditions are unlikely to return any time soon."

She said restoring the global financial system to health was a precondition for a recovery in credit supply and economic activity.

She also warned that the next big challenge for financial institutions would be rising bad debts.

"Bad loans normally rise relative to total lending when economies turn down and the current global downturn will be no exception to this pattern. In the current environment this could weigh on the profitability of already weakened banking sectors in major economies."

Policy initiatives under discussion for reform of the system included changes to the regulation of credit ratings agencies, a review of remuneration structures for bank executives and tighter regulation of bank capital and liquidity.

Ellis said one of the factors that allowed the Australian banks to weather the global financial crisis in good shape was the strength of the local regulatory framework.

Australian regulators are participating in discussions at the Financial Stability Board and have recently been invited to join the Basel Committee.

Ellis said confidence in the financial system remained fragile. One reason for this was uncertainty about the likely outcome of measures taken to restore bank balance sheets.

"Governments have ensured banks' access to funding by guaranteeing wholesale debt issuance. Some have injected capital into banks.

"A few have helped banks reduce the risk in their balance sheets. There are several ways of undertaking this de-risking of balance sheets. At this stage it is hard to say if there is one right way to deal with these issues."