The Reserve Bank has detailed grave concerns about the future of the worldwide financial system as Australia's four key regulators have signed a historic pact outlining how each will act in the event that an Australian bank fails.
The "crisis management" memorandum agreed to by the Bank, the Treasury, the Prudential Regulation Authority and the Securities and Investments Commission sets out a "co-ordinated response to potential threats to the stability of Australia's financial system."
The Bank's Financial Stability Review released yesterday says while the four organisations have worked together well so far during the financial turmoil, the memorandum will "further strengthen these relationships and improve public understanding".
The memorandum sets out which organisation will do what, the overall objectives to keep in mind, and the way in which the organisations will work with each other.
Lack of co-ordination is thought to have been one of the main reasons that the US was slow to respond to its crisis in its early stages...
In the United States President George W Bush warned that the entire US economy was in danger unless the Congress passed the Treasury's $US700 billion financial sector rescue plan.
"We are in the midst of a serious financial crisis,'' he told the nation in a televised address.
"Major sectors of America's financial system are at risk of shutting down. Our entire economy is in danger.''
In Australia the ANZ chief executive Mike Smith said there would a depression if the plan was not approved by Congress.
"I actually believe that the sheer seriousness of last week's events is not properly recognised," he said.
"I think the banking system in the US would go into a complete, yes, would freeze is a good word, and the knock-on effect of that on payments systems throughout the world would be huge."
"If Congress does not approve the plan I think I'll take up farming".
The Reserve Bank also came out in favour of the plan, warning in its Financial Stability Review of a "damaging feedback loop running from the financial sector to the economy and back to the financial sector".
The danger was compounded by "a straining of the bond of trust between many banks and investors".
This has come after "a number of years in which investors were prepared to borrow heavily to buy risky assets at fine margins".
"With the pendulum now having swung the other way, the adjustment is proving more difficult and costly than many had expected," the Bank said in its review.
Australia's financial system has coped better "than many others".
Australia's big five Australian banks reported headline profits after tax of around $10 billion in the first half of this financial year, up 12%
By contrast the total profits of the US institutions insured by the Federal Deposit Insurance Corporation were down 75%.
Non-performing assets accounted for only 0.7 per cent of Australian banks' balance sheets, and non-performing housing loans accounted for only 0.4% of housing lending.
However in parts of western Sydney non-performing loans were much higher - exceeding 1.6%.
"Nationwide, the six areas with the highest arrears rates are all in western Sydney, the Bank said.
The evidence suggested that the "newer lenders, seeking to increase their market share, in part through looser lednign standards" had been "particularly active" in western Sydney
Memorandum of Understanding
Parties: Reserve Bank, APRA, ASIC, Commonwealth Treasury
RBA- maintain financial system
APRA - protect depositors, policyholders and fund members
ASIC - ensure market integrity
Treasury - advise on implications and threats
. Minimise super fund and bank losses where possible
. Maintain confidence in financial system
. Ensure that owners and directors of distressed institutions bear appropiate responsibility
. Minimise economic impacts
- Information to be shared.
- The Treasurer to communicate with the public.