Business failures will increase even as the Australian economy starts to recover from the coronavirus pandemic's impact, a senior Reserve Bank official says.
RBA assistant governor Michele Bullock gave the assessment in an online speech to the Ayr Chamber of Commerce on Tuesday night.
"Business failures are currently much lower than usual because of income support, loan repayment deferrals and temporary insolvency relief," she said.
"But this can't last and we expect to see failures rise.
"Survey evidence suggests that around a quarter of small businesses that are currently receiving income support would close if support were removed now and trading conditions had not improved."
She said this would have an impact on banks' balance sheets - but they had started from a good position going into the pandemic with a lot of capital and strong profits.
The four major banks - which account for around 75 per cent of banking system assets in Australia - have capital ratios of at least 10.5 per cent.
And on average over the five years to 2019, the return on equity for Australian banks was around 12 per cent.
Ms Bullock said one area of particular concern was commercial property, especially in the retail sector and Sydney and Melbourne CBD office space.
With new CBD office supply coming onto the market and vacancy rates rising, commercial property prices "could experience sharp falls in this environment, putting pressure on investors that had borrowed to invest in such property", she said.
Non-performing loans to households were expected to continue to rise over coming months.
But while the pandemic had had a devastating impact on the global and Australian economy, the financial system had "withstood the test", Ms Bullock said.
Australian Associated Press
