SYDNEY, Oct 12 (Reuters) - Australia's central bank on Friday laid out a laundry list of economic risks including falling home prices, high household debt, wide scale misconduct by banks and strains in global financial markets.In its 90-page Financial Stability Review, the Reserve Bank of Australia (RBA) emphasised the economy overall was improving but highlighted the threat from a housing slowdown."A large or rapid correction in housing prices could be disruptive for the financial system and household balance sheets," the bank warned.It noted that, so far, the decline in prices was modest compared to the decade-long boom that preceded it, with values in Sydney and Melbourne still 50 to 60 above where they were in 2012.However, sentiment toward the market had turned more cautious as regulators had tightening lending standards to head off a possible bubble in the sector.Banks have also become tougher on borrowers in the wake of a government inquiry which found widespread misconduct, including charging dead customers and fees for no service."It is possible, though not likely, that an excessive tightening in lending standards could exacerbate the current housing slowdown," the RBA said.While much of the tightening by regulators was already in place, banks were further adjusting their own standards.An added danger to the economy was the historically high levels of household debt in Australia."Highly indebted households could cut back their consumption if their financial position were to be less secure," the RBA said.The report also castigated the banks for a "poor culture" of putting short-term profits ahead of customer interests.
"To date, the financial implications for banks have been small, but the consequences of reputational damage could impair banks' profitability and resilience," the RBA said.It added that while banks' return on equity had declined recently - to around 12 percent - it was still high by international standards, implying there was room for it to fall further.Looking abroad, the RBA cautioned there were a "range of possible triggers" that could cause a global downturn.These included the risk of a slowdown in China, Australia's single biggest export market. An escalation in trade tensions amid the tit-for-tat tariffs imposed by the United States and China.Another was a pick up in global market volatility, a timely warning given the steep falls in world share markets suffered this week, and contagion among emerging market countries with large external liabilities.
Keywords: AUSTRALIA ECONOMY/RBA
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