Canada and Australia risk banking crisis, Fitch says

Canada and Australia are running the risk of a banking crisis of the type that hit Iceland in 2006, according to a report from Fitch Ratings.

The agency gives economies a macro-prudential indicator of 1 to 3: 3 represents the highest level of vulnerability to the sort of systemic stress that tends to trigger a banking crisis. In its latest banking report, issued today, Australia, Canada and Iran are demoted to 3, joining Iceland.

A score of 3, Fitch says, means private sector credit is abnormally high as a share of GDP, and that property prices and/or exchange rates are also well above trend. Fitch pointed out that credit growth had been rapid in 2006. Australia and Canada's currencies have also strengthened on the back of rising commodity prices.

The agency also measures the robustness of the banking system on a scale of A to E. Australia is classed A and Canada B, implying that both have strong banking systems. Iceland and South Africa are also classed as B and have risk ratings of 3.

By this measure, the most endangered economies - with high risk scores and weak banking systems - are Russia (D3), Azerbaijan (E3) and Iran (E3). All developed economies are either A or B with the exception of Japan (C).

Iceland suffered from a sudden correction in February last year, after Fitch raised its risk rating to 3 and downgraded its long-term default rating to "negative outlook"; growth has slowed and both inflation and interest rates have risen.