American roulette misses Aussie Banks

Implications: 1. Australian banks have little exposure to US sub-prime mortgages. 2. Turmoil in financial markets has had no immediate impact on the credit ratings of Australian Banks.

Analysis: Last couple of years saw the Americans busy planting time bombs in the balance sheets of financial institutions all over the world, in the shape of sub-prime mortgages.That is why there is a periodic felling of a financial institution somewhere in the world creating panic seizures and tremors. 

Australian banks acted early to boost their liquid assets and raise market funds where available and demonstrated a willingness and ability to continue to acquire wholesale funding. Added to that the Reserve Bank of Australia (RBA) ensured that liquidity in the banking system remained sufficient and financial institutions were willing to finance each other.However,

1. Australian banks have not really engaged in lending to the credit-impaired.
2. Higher loan-to-value mortgages are insured as a result of regulatory capital incentives.

It is not to say there haven't been any problems. Problems gripped the Australian hedge fund Basis Capital mid last year. Recently,shopping mall owner Centro Properties was levelled by the sub-prime tsunami and is facing a countdown. But the exposure has been negligible.

Due to the complexity of securitisation structures and sometimes limited disclosure, it has been difficult to know which financial institutions have had exposures to risky sub-prime mortgages and how much, until of course, it is too late.

In current scenario, Australia's larger banks stand to gain because,

1. their large balance sheet
2. better access to unsecured funding and 
3. the potential for lower capital requirements under Basel II as Advanced Internal Ratings Based banks, relative to smaller institutions which will adopt the standardised approach.  

The flow on effect would be a healthy correction in the credit markets  as the sub-prime show is still going on and it could get a little worse before it gets better.