How safe are Australia’s banks? What will happen to the 800,000 loans they have deferred? Will the recession create a tidal wave of mortgage defaults that sends banks to the wall?
Banks were instructed by the banking regulator earlier this year to not pay dividends to their owners, but instead hoard those profits as defence against running out of capital. It sent a signal that the regulator was deeply concerned about the health of Aussie banks.
That rule has since been loosened, but the risks are far from over. Aussie households are hanging on for now, but as Christmas approaches income support will be removed and then early in the new year banks will start to demand loans once again be repaid.
So what will happen to Australian banks during this recession? They stand behind trillions of dollars worth of loans in this country, and many of those loans are still at risk. The biggest category of loans Australian banks own is mortgages, and they have performed so well for so long that it is worth worrying that banks may have become complacent.
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Sign of the times: mortgage defaults will happen if the recession creates a perfect storm