Every big-four bank in Australia has a loan-to-deposit ratio of well over 100% (ie. they have lent out far more money than they carry in deposits). But few people fully understand how dependent our banks are on foreign debt and the swap contracts worth almost half a trillion dollars (to insulate against currency and interest rate movements) which are designed to mitigate exposure to these 'known' risks. And that brings us to the key issue.
Should future convulsions in the global financial markets send any of the institutions on the other side of these contracts to the wall, our banks would become more exposed to the harsh winds of the international financial markets. And if the past few years are any indication, the Australian dollar tends to fall in times of uncertainty.
So the very conditions which might bring about the failure of the banks' counterparties would be highly likely to coincide with a plunging Australian dollar; thus blowing out the repayments of foreign currency-denominated debts in local terms;
So Australian banks are more exposed to global risks than most Australians, and even most bank execs, realize or care to consider. A renewed GFC, leading to frozen international credit markets and increased counter-party risk, would directly and severely affect Australia's banking system. Australian banks would be more severely tested than most banks around the world if global credit markets freeze up again (due to their over-reliance on international wholesale funding). And if one of the last remaining asset bubbles in the world (Australia's housing market) deflates then they'll be left floundering - especially as almost half of their balance sheet is backed by housing mortgages (more than any other banks in the world). So an Australian banking collapse, under the weight of excessive and manic lending to the housing market, is a likely scenario, not a 'worst case' scenario.
However, given that our government would be forced to rescue our banks from collapse, by way of a guarantee on deposits, they should stay afloat during such a global crisis (likely lasting several years during an epic debt deleveraging cycle). That's provided the government maintains the confidence of the Australian public so there is no run on the banks (which it should do considering Australia's low level of public debt). Mortgage holders and home owners who lose equity (or their homes) and bank share holders will be the big losers. But there will be few winners during such deflation (except those who remain debt free and cashed up).
