Market headed for credit roller-coaster ride

Released Tuesday, the PwC Banking Banana Skins 2014 survey was conducted in January and February 2014, achieving 656 responses from bankers, banking regulators and close observers in 59 countries.

Respondents stressed that bank debt levels remain high globally, and could easily deteriorate if the global economic recovery falters or interest rates rise sharply.

The report - which describes the risks currently facing the global banking industry – also found the twin problems of consumer debt and mortgages where doubtful loan levels remain high in many countries, including Australia.

While Australian banks are strongly capitalised, interest rate fluctuations are an important part of the assessment process for mortgage lending, Australian Banking Association chief executive Steve Münchenberg told Mortgage Business.

“When assessing a person’s ability to repay a mortgage, banks do take into account that interest rates can increase and this is an important consideration in the assessment process,” Mr Münchenberg said.

“Australians continue to pay down debt, a trend that has been occurring since the GFC, and Australian banks have a strong track record in mortgage lending,” he said.

Tony Greenham, head of finance and business at UK think tank New Economics Foundation, responded to the PwC survey with particular concern about home lending risks.

“The fundamental bias towards credit secured on assets, particularly property, has not really been addressed by any of the regulatory or institutional reforms since the crisis,” Mr Greenham said.

“Hold your hats for another roller-coaster ride,” he warned.

While the threat of a rate rise has alarmed the survey's international respondents, credit risk has actually declined since last year’s report, down from No. 2 to No. 7.

The greatest risk facing the banking industry today, according to the respondents, is the burden of new regulation.

However, there are important points of difference in their attitudes towards institutional risk.

“Non-banker respondents believe that banks are vulnerable to weak corporate governance and risk management, while bankers play these risks down,” the report said.

The top concerns in the Asia Pacific region were potential macro-economic disruptions and the risk of sharp changes in interest rates.