The major Australian banks' ability to withstand a severe downturn in the housing market and household sector, has been strengthened by regulatory intervention to tighten underwriting standards and bolster capital buffers, Fitch Ratings argues in a recent report on Australia's Big Four banks and their New Zealand subsidiaries. "Regulatory intervention in the Australian and New Zealand mortgage markets has helped banks to manage growing risks in the household sector," Fitch says. "In Australia, this has been through interim measures limiting the increase in mortgage types (investor loans and interest-only loans) that Fitch views as riskier and focusing on strengthened serviceability testing; while in New Zealand, the focus has been on limiting growth in mortgages with higher loan/valuation ratios." These actions should assist the major banks to withstand a severe downturn in the housing market, although Fitch warns that "high (and growing) household indebtedness means consumers in both markets are increasingly susceptible to a rise in unemployment or interest rates." Fitch sees the real danger for the local majors as "risks to asset quality due to rising macroeconomic, largely stemming from households."Household debt is high by historical and international standards, at 188 per cent of disposable income at end-September 2017, and could increase further, given low interest rates and high house prices.  Indebtedness and sluggish wage growth make households vulnerable to changes in economic conditions, particularly a significant increase in unemployment or interest rates. A large house price drop could also undermine banks' asset quality, given that residential mortgages account for about 70 per cent of household debt. "Our base case is that unemployment will edge down over the next two years and that the cash rate will only rise moderately. Meanwhile, house prices are likely to increase slightly in 2018, albeit at a slower pace than in previous years due to curbs on investor and interest-only loans introduced in 2017," the report says.  It adds that the regulatory measures to limit types of lending viewed as riskier, as well as those to strengthen serviceability testing, have also helped banks to manage risks associated with the household sector, and should put them in a stronger position to deal with more severe scenarios.  "In general, we view the regulators as being proactive in their approach to maintaining financial stability and expect further intervention should pockets of risk emerge. Accordingly, the regulatory environment is a positive for the Australian major banks' ratings." The major banks dominant position in their home markets gives them strong pricing power, which makes them more profitable than most of their international peers.  That said, an increased focus on conduct and competition by the authorities may limit their growth potential and could eventually challenge their pricing power. Digital disruptors also pose some longer-term risks, but banks are responding with technology investments, the Fitch report notes.