Banks’ main vulnerabilities are their exposure to highly indebted households through residential mortgage lending, together with their sizable short-term offshore borrowing. Household debt is high at about 150 percent of disposable income but is held mainly by higher income households. Moreover, exposure to high-risk mortgages is small. The potential risks associated with household lending are mitigated by a number of factors, including banks’ prudent lending practices and Australian Prudential Regulation Authority (APRA)’s conservative approach in implementing the Basel II framework. Banks also have reduced their use of short-term offshore wholesale funding by increasing deposits and lengthening the tenor of their.
