Ratings agency S&P Global has downgraded almost all financial institutions in Australia because they face an “increased risk of a sharp correction in property prices”

Ratings agency S&P Global has downgraded almost all financial institutions in Australia because they face an “increased risk of a sharp correction in property prices”, by Carrington Clarke.

Twenty-three institutions, including AMP, Bank of Queensland, Bendigo and Adelaide Bank and Credit Union Australia, received downgrades to their stand-alone credit profiles. …

Effectively, S&P believes high house price growth in recent years has left banks vulnerable and made it less likely they can pay out their debts in the future.

In other words, S&P thinks there is a prospect that large numbers of Australian mortgagees will not be able to pay back their loans, and the banks will not be able to recover their money by selling their houses because of falling house prices.

The ratings agency said Australian financial institutions were particularly susceptible to a housing correction with “residential home loans securing two-thirds of banks’ lending assets” and “the impact of such a scenario on financial institutions would be amplified by the Australian economy’s external weaknesses, in particular its persistent current account deficits and high level of external debt”.

The “big four” banks, however, managed to escape a downgrade because S&P believes they are likely to receive “timely financial support from the Australian Government” if there is a housing crash.

S&P believes the big banks are likely to receive preferential treatment from the Government if the housing market were to crash.

“Too big too fail” is an invitation to take risky behavior. Wouldn’t it be better to make the big four banks smaller, so they are kept honest by the possibility of failure?