More equity: RBA's commercial property finance solution

The over-exposure of foreign banks and small banks to commercial property lending - or at least their over-exposure to stressed property developers - was one theme of a speech delivered by Reserve Bank of Australia deputy governor Ric Battelino on Friday.

Fifteen per cent of commercial property loans provided by foreign banks are impaired as of mid-2010, Battelino said. Lloyds Banking Group must be the most heavily stressed of the foreign banks in this sector.

A supporting chart shows that the ratio of "other Australian" banks is around 13 per cent, a number dominated no doubt by Suncorp but in which Macquarie may also feature.

For major banks the ratio is around four per cent.

The pattern of impaired property loans follows trends in lending growth before the boom peaked three years ago.

Battelino said lending to the commercial property sector began to pick up noticeably from around 2004 onwards, and at its peak, just before the global financial crisis, was growing by 27 per cent per year. Foreign-owned banks were the lenders with the fastest growth through this period

"It is difficult not to conclude that the financing of the property sector became over-extended during the boom years and that a period of adjustment was largely unavoidable," Battelino said.

"Cycles like the one we are going through seem to be endemic to the property sector and raise the question of whether, over the longer term, the financing model of the sector should shift towards more equity and less debt."