Australia's Central Bank said Thursday that the nation's banking system remains one of the world's strongest, is well-financed and in a good position to weather the global economic crisis.

In its semi-annual Financial Stability Review issued Thursday in Sydney, the Reserve Bank of Australia notes that that while the global financial system continues to experience significant stress, the Australian Banking system has performed well over recent times.

The RBA said banks continue to report solid profits, albeit lower than in recent years, are soundly capitalized and the larger banks have high credit ratings.

The central bank noted that any deterioration in finance sector health in the current economic downturn has not become nearly as severe as in the most recent recession in the early 1990s. The statement acknowledged a rising amount of bad debts carried by Australian banks, with the country's top 5 banks reporting charges for bad and doubtful debts at A$5.3 billion at mid-year compared to A$1.4 billion in the same time period last year.

The central bank also pointed to government guarantees on customer bank deposits, saying the move appears to have led to deposits at banks, credit unions and building societies to grow at an annualized rate of 20 percent, the fastest growth for many years.

Both household and business deposit flows have been above average, with growth in term deposits particularly strong, the RBA said, which was borne out in the latest Westpac/Melbourne Institute surveys showing that a third of households viewed banks as the wisest place for savings.

While loan arrears have risen from their unusually low levels of recent years, and a further increase is expected in the period ahead, the Australian banking system is considerably better placed to weather the current challenges than many other systems around the world, the RBA said.

The RBA is taking a wait-and-see attitude toward the steps announced by the Obama Administration to rid the U.S. banking system of toxic assets by acquiring them through a combination of public and private funds, then selling them at discount.

It could be some time before it is clear whether these initiatives have been sufficient to put the financial sector on the path to recovery, the RBA statement said.

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