Australia's "small" banking sector protects it from risk of bubble corrections: RBA

Limited expansion of the Australian banking sector relative to other first world countries post-GFC protects it from further possible corrections, says RBA assistant governor Malcolm Edey.

Speaking in Melbourne on Friday, Edey noted that there were "certainly elements of bubble-like behaviour in the few years leading up to the GFC" and seen in some countries where the financial sector became too big relative to the size of its economy.

But this had not occured in Australia, where the banking sector funds more than 90% of home loans and where more than 80% of the mortgage market is held by the big four banks.

Edey gave as an example a number of countries decimated by the collapse of their banking sectors (and where property markets collapsed as well) notably, Ireland, where the the total assets of the Irish banking system peaked in 2009 at a ratio of nine times its annual GDP as well as Iceland, where the ratio peaked at seven times its GDP and to a lesser extent, but still above historical norms, the UK, where the peak was around a ratio of five to one, and in France at a ratio of four to one.

"In Australia the banking sector did expand relative to the economy, but it remains significantly smaller than many others. On the rough metric of banking assets to GDP, Australia's ratio is about two, which is well within the international range and well below those in the euro area, the UK and Japan," he said.

"So to the extent that any generalised financial overhang exists, it is less likely to be a problem here than elsewhere.

"That said, attitudes to risk and debt accumulation in the Australian household sector have clearly changed. Saving rates are up, the appetite for new debt is down, and attitudes to both the level and composition of household saving have become more conservative," said Edey.

He presented the following chart, which shows the modest size of the Australian banking sector relative to other countries, but also that corrections have occured in some of the worst-hit economies of Ireland and Iceland.