NZ financial trouble risk to Australian banks, IMF says

Financial trouble in New Zealand could be a problem for Australia's banks, the International Monetary Fund says.

The trouble would quickly spread to Australia through the banking system, potentially cutting Australian banks off from international funding.

The IMF has identified Australian banks' exposure to New Zealand, lower lending standards, a high exposure to highly geared households and reliance on international funding as the main risks to Australia's banks, The Australian newspaper reported today.

"Contagion effects from New Zealand banks to Australian banks could be more severe than indicated by the relative size of their balance sheets," the IMF warned.

Australian banks dominate the New Zealand banking market.

In both Australia and New Zealand, the banks have a high level of exposure to a heavily leveraged household sector.

They also depend upon the support of international financial markets for their funding, because of the decline of traditional bank deposits.

The IMF said Australia's financial system was in good health and well supervised, but still carried some risks.

But it identified access to funding as a risk in the banks' New Zealand exposure.

"If there were to be financial difficulties in a New Zealand subsidiary, the effects on Australian banks could be material, especially on the funding side.

"Even if these threats to the parents' liquidity were averted, the reputational cost to the Australian bank of the failure of a New Zealand subsidiary or branch would be substantial, probably impacting the external funding of the parent bank."

- NZPA