Rough times ahead in Australia banking system

Yet Prime Minister Julia Gillard stressed local banks have only marginal exposure to the euro-zone woes.

Australia's financial system faces a range of policy challenges from dealing with the impact of a roaring mining boom to managing systemic risk and moral hazard in a banking network dominated by four big lenders, the Financial Stability Board said in a report.

Australia's banks emerged relatively unscathed from the worst of the 2008 financial crisis but leaned heavily on the government's borrowing guarantee to access wholesale funding markets. Asset quality was also helped by massive fiscal and monetary stimulus while a growing deposit base has cut the need to borrow in public markets.

In its report on Australia the Switzerland-based Financial Stability Board outlined three primary challenges for the country's banking system: dealing with the mining boom, managing a dependence on wholesale borrowing and safeguarding against the systemic and moral hazard posed by a concentrated banking network.

"The economy's increased exposure to potentially volatile and cyclical commodity prices warrants particular focus. The use of prudential tools may be considered to manage sector-specific risks stemming from the structural changes in the economy," the FSB said in its report.

The four biggest banks, Westpac Banking Corp., Australia and New Zealand Banking Group Ltd., National Australia Bank Ltd. and Commonwealth Bank of Australia account for 75% of total assets held by authorised deposit taking institutions, or ADIs, in the country.

"There has been a marked increase recently in the concentration of the ADI sector," the FSB said.

Continuing to reduce a reliance on wholesale funding is important but regulators will need to closely monitor the liquidity positions of the nation's banks and steer clear of depending on one source of funding, the report said.

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