Speech Summary Remarks to ASIC Annual Forum 2016
The speech asks the high-level question ‘how do we withstand shocks?’. It then breaks this down into two parts for consideration: ‘what shocks are we grappling with at present?’; and ‘how do we assess our capacity to cope with those, or worse?’.
On the first question, the speech notes several recent developments. The first is the decline in commodity prices. The speech suggests that, to date, the Australian economy has adjusted well to this shock. Regarding the fall in oil prices, it examines the possible effects on the global economy, exploring why forecasters have apparently been pessimistic – perhaps unduly so – about these impacts. Second, the speech notes the reduced global growth outlook for 2016, which incorporates weaker growth in the emerging world. It talks in particular about the transition in the growth ‘model’ being attempted in China, noting that there are no precedents for such a transition on this scale. A third theme is a degree of policy uncertainty on several fronts as policymakers seek to generate sustainable growth in difficult circumstances. This has seen long-term interest rates remain at exceptionally low levels, with policy uncertainty a contributor to heightened volatility in financial markets recently.
Moving on to the question of resilience, the speech notes that banking systems are better capitalised and more liquid, and hence more resilient and less likely to be an amplifier of shocks than they were in the past. One counterpart of this has been that an increased proportion of financing is now sourced in capital markets, which are now less liquid. This could mean more significant price movements in times of stress. But it posits that credit risk being channelled through less-leveraged entities is on balance good for sustainable growth.
The speech points to evidence that the Australian economy was picking up during 2015, a good starting point for any future shock. It indicates that macroeconomic policy would have scope to respond to significant negative events, should they occur. The speech emphasises that banks have been improving asset quality, adding capital and strengthening their funding structures. It notes that all this has been supported by coordinated action by the financial regulators. The speech highlights one potential point of caution, in relation to the recent rapid expansion of foreign banks in the Australian business lending market.