Hard-pressed lenders are now “out of their minds” about their finances, as banks are struggling to cope with an expected surge in deposits and loans as a result of the global financial crisis, a new report has warned.
The report, compiled by the Reserve Bank of Australia (RBA), says the economy is set to grow more slowly this year than in 2016 as a whole and will be less robust than the previous year.
The RBA’s report shows the Australian banking system is now “entrenched in a long-term, persistent recession” and is now in danger of becoming a “lost generation” of borrowers, with household debt levels forecast to rise by around $20 billion in the year to the end of September.
The latest report, issued ahead of the Bank of England’s next rate-setting meeting, also says there is a risk of another global financial shock that could lead to the banks being forced to take a significant haircut on their assets.
“There is a lot of doubt about the future of the Australian economy and the outlook for the economy as a general, global economy,” the report said.
It also warns that Australia is “in a long term, persistent decline” in its banking sector, with the banking sector contributing about 20 per cent of GDP and “growing at about the same rate as the rest of the economy”.
“At a time when our banking system remains vulnerable, there is an opportunity to change course and improve its governance and operational capability,” the RBA said.
The RBA is expected to deliver its quarterly Monetary Policy Report on Thursday.
In its report, the RBS said its economic growth forecast was now set at 1.4 per cent, compared with 2.0 per cent in April.
It said the Bank was “undermining its own forecast” of growth of 2.5 per cent this year.
It also noted that the Reserve Banks forecasts of growth were “on the low side” of what it said were the “normal” growth rates in Australia.
The bank’s chief economist, Michael Saunders, said the “big picture” showed that the economy was “not doing well”.
He said the bank was now “overstretched” and was “focussed on doing whatever we can to manage the financial crisis better”.
In a separate report released on Wednesday, the Australian Council of Social Service said the banking industry’s role was now being “contested” by the private sector, in particular with the growth of payday loans and online lending, and that “banks and their customers are not getting a fair share of the credit and the recovery”.
The council said there were concerns about the banking system’s ability to respond to a range of financial risks, including a “frozen asset” scenario where banks’ balance sheets remain “off balance” and vulnerable to a “cascade of financial shocks”.
It said it was concerned that the banks were “losing confidence” in the ability of their “customers” to take “full advantage of the financial system”.
Meanwhile, the Senate committee overseeing the RBC’s review found that the bank had “systematically” failed to deliver on its commitments to ensure that customers were able to access credit and repay loans, including its efforts to provide loans to low-income people and people with disabilities.
Committee chair, Senator Cory Bernardi, said he was disappointed the bank failed to respond appropriately to the concerns raised by the committee.
Senator Bernardi said he believed the bank needed to “put more pressure” on its employees and improve governance.
He also said he had concerns about whether the RAB would do enough to rein in banks in the short term, given the impact the financial sector is having on the economy.
Mr Saunders said the RIB had “an extremely good track record” of delivering on its financial and operational commitments.
‘A lot of scepticism’The RBC also found that it was “clear that the banking and consumer sectors have significant challenges to address in the near term”.
And the report added that it found that there was “a lot of uncertainty” about the sustainability of the banking business.