The report also pointed to rising "tail risks" associated with rising house prices, as a "combination of low nominal income growth and buoyant housing conditions in the key Sydney and Melbourne markets have led to an increase in household debt and overall credit-to-GDP ratios". Household leverage, measured by debt to income, had increased by 20 percentage points since the end of 2011 when the RBA commenced cutting interest rates, contributing to rising debt levels in the economy. "While low interest rates are currently supporting the debt servicing capability of borrowers, we view the combination of low wage growth, high household leverage, and rising property prices to be increasing tail risks for Australian banks," the report said, Furthermore, the agency said that bank asset quality was about as good as it is likely to get while the unwinding of the global commodities cycle would pressure certain parts of the banks lending portfolio. Last week rival credit rating agency Standard & Poor's placed their AA- ratings of the major banks on a negative outlook, reflecting the negative outlook of the AAA Australian sovereign rating. This reflected the implied support of the government to the banking sector, given its importance to the economy. So far, however, the impact on bank funding costs has been marginal with little movement in bank credit spreads. As of this week, the cost of insuring against a default in $10,000 of five-year bank debt was $85, compared to $140 in January of this year. This proxy measure of bank funding costs reached as high as $240 in 2012 and fell below $50 in September 2014. Moody's has an "Aa2" rating on the big four major banks, the equivalent of one notch higher than the AA- ratings assigned by Standard & Poor's. At present, Australia's banks sit within an elite group of AA rated banks which include Scandinavian and Canadian lenders, HSBC, Wells Fargo and BNY Mellon. Moody's acknowledged that the big four banks had increased their Tier I capital ratios by 350 basis points to sit within the top quartile of banks – increasing their ability to withstand credit losses. But the agency said that "without countermeasures, slowing profit growth and rising housing risks could negatively impact the growth of loss-absorbing buffers".
Moody's credit rating agency has warned Australia's large banks that they may have their high ratings downgraded as prolonged low interest rates in the country continue to put pressure on the banks' credit profiles. The report also suggested that low wages and high housing prices throughout Australia are raising the tail risks for banks with an increase in household debt and overall credit-to-GDP ratios. Last week, National Australia Bank, Westpac, ANZ and Commonwealth Bank had their ratings downgraded by Standard & Poor's to AA- with a negative outlook.