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Australia's banking system is highly profitable and well capitalised, with household and business balance sheets "in good shape", despite the global credit crisis, the Australian central bank said.
Australian banks - which own all the major New Zealand banks - had limited exposure to the US sub-prime mortgage market fallout, the Reserve Bank of Australia said in its Financial Stability Review.
The relatively small size of the local non-bank home loan industry and lower bad debts relative to the rest of the world had enabled them to shrug off most of the effects of the worst credit-market shakeout since 1998.
"Balance sheets have continued to grow strongly over the past year and bad loan expenses remain low," the bank said in its report.
Still, an increase in borrowing costs may spur Australia's biggest banks to fund more loans from their balance sheets rather than through capital markets, the bank said.
Westpac, ANZ Banking Group, National Australia Bank and Commonwealth Bank of Australia this month lent more than A$10 billion ($11.65 billion) to their investment vehicles that had been unable to raise money in Australia's short-term debt markets.
One-month bank bill swap rates, which banks use to determine yields on variable rate loans, fell the most in almost two weeks on September 18 when the Federal Reserve's interest rate cut encouraged investors to re-enter the credit markets.
The biggest banks may benefit as they pick up business lost by the nation's non-bank lenders, who face slowing demand for their loans, the central bank said.
Rams Home Loans, a Sydney-based non-bank home loans company, failed to refinance A$6.18 billion of short-term debt in the US last month as the cost of selling debt soared, underscoring the difficulties faced by non-bank mortgage firms in financing their businesses amid the current credit crisis.
Members Equity Bank, a Melbourne-based non-bank home loans company, was forced to scrap a A$500 million sale of home loan-backed bonds on August 3 after failing to find buyers.
-Bloomberg
