Re-rating the system for a low risk sector

Ratings agency Standard & Poor's believes that Australia is likely to remain one of the lowest-risk banking systems among the 85 that have Standard & Poor's banking industry country risk assessments.

"In our base case, we expect the credit profile of Australian banks to remain largely unchanged in the remainder of 2015," the ratings agency said. S&P said "key supportive economic settings" on economic growth and employment would remain and a material correction in Australia's residential property market was "unlikely".

However, S&P warned that potential changes in the regulatory, legislative, and policy landscape could impact Australian bank ratings, particularly those of the major banks. "In particular, potential changes with respect to creditor bail-in and regulatory capital requirements stand out as the developments most likely to impact the Australian banks' credit profiles from our stable base case setting," the agency noted in its report.

"In our view, the creation of statutory bail-in power alone would lower the likelihood of the government providing timely financial support to an Australian bank," it said. This could affect ratings as they currently factor in a higher expectation of government support.

Conversely, changes on risk weightings for residential mortgage loans for banks that apply the internal ratings based approach for their regulatory capital measurement, or the imposition of an additional capital requirement on domestic systemically important banks could strengthen the stand-alone credit profiles of the major banks, S&P said.