Banking woes easing significantly - RBA

GLOBAL financial conditions have improved, but the Reserve Bank of Australia is warning we're not out of the woods yet.

The RBA says despite the recent flare up of financial problems in Cyprus, the euro zone's commitment to resolving its government debt and banking problems has boosted confidence.

An improvement in the US economy and recent share markets have also helped.

And the improved confidence levels have helped lower the cost of borrowing for governments in a number of euro zone countries.

However the RBA believes the euro zone faces significant challenges to its stability.

"Many banks, particularly on the periphery, are still experiencing elevated funding costs, deteriorating asset performance and weak profitability," the RBA said in its twice-yearly Financial Stability Review released on Wednesday.

The RBA warned that Europe still needs to repair its banking system while also promoting economic growth for the problems to be fully resolved.

"It is too early say whether the improved in market sentiment over the past six months is the beginning of a sustained recovery or merely a temporary upswing," the central bank report said.

Meanwhile, the RBA believes Australia's banks are in a strong position and the improved global conditions since mid 2012 had helped lowered wholesale funding costs.

Growth in savings was outstripping credit growth and there was strong competition for bank deposits.

The big four banks were also still raking in record profits and improving their capital position.

"With domestic demand for credit likely to remain moderate in coming years, banks are increasingly pursuing other strategies to underpin their profit growth," the RBA said.

However the RBA warned against lowering lending standards and advised banks to be cautious as they expanded into Asia.

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Cyprus launches banking overhaul

CYPRUS has launched an overhaul of its banking sector to avoid financial meltdown after the European Central Bank (ECB) threatened to pull the plug on emergency funding for the island's banks.

Cypriot politicians have until Monday to approve a "Plan B" bailout deal with the European Union (EU) and the International Monetary Fund (IMF) or face being choked from ECB emergency funds, a move that would likely cause the teetering banking sector to collapse.

Intense pressure for a deal also came from the EU, with a source warning that unless the island pushed a workable plan through parliament and overhauled its banking sector by Tuesday it risked expulsion from the eurozone.

Central Bank chief Panicos Demetriades said bills had been drafted "relating to the reorganisation and recovery of the Cypriot banking system".

"This consolidation process will prevent the risk of bank failures and protected in their entirety all insured deposits up to the amount of 100,000 ($A125,573)," he said as he entered the presidential palace for emergency talks with the cabinet ahead of an expected session of parliament.

The government urged against panic while it redrew the plan to resolve the chaos unleashed by an initial scheme to tax bank accounts - many of them Russian - by 5.8 billion euros ($A7.28 billion) to complement 10 billion euros ($A12.56 billion) in eurozone and IMF loans between now and 2016.

Part of the new package involves setting up a "national solidarity fund," which media reported would nationalise provident funds, with bonds issued against future natural gas revenues.

The speaker of parliament, Yiannakis Omirou, insisted a revised levy on bank deposits was not on the table, in a move seen as placating Russians who are believed to have more than $US30 billion ($A29.05 billion) in private and corporate cash in Cyprus banks.

An anxious crowd gathered outside parliament expecting Plan B to be put to a vote by lawmakers once it had been passed by the cabinet.

Around 200 protesters outside the legislature, mostly employees of the bank in the eye of the storm, including many women, held placards reading "Hands off Laiki," and "Laiki now, what next?" of the Laiki or Cyprus Popular Bank.

With banks in lockdown until Tuesday, queues formed during the day outside cash dispensers amid fears of an indefinite bank closure.

The Popular Bank announced a limit on withdrawals of 260 ($A326.49) a day because of a "high demand for cash" from its ATMs, which were besieged by customers drawing their daily limits of up to 700 euros.

Central Bank chief Demetriades said that without the legislation the island's second largest bank faced the threat of immediate bankruptcy.

"With the establishment and enactment of the above legislative framework, consolidation measures will be implemented at Popular Bank, in order for it to be able to continue to provide banking services to customers, with the reopening of banks on Tuesday," he said.

The troika of lenders - the EU, ECB and IMF - agreed to the 10-billion-euro bailout on Saturday on condition that Cyprus raised the other 5.8 billion euros.

Lawmakers on Tuesday flatly rejected a highly unpopular measure that would have slapped a one-time levy of up to 9.9 per cent on bank deposits as a condition for the loan, leaving the government scrambling to find other ways to raise cash to repay its debts.

The chairman of the Eurogroup of finance ministers, Jeroen Dijsselbloem, told European Parliament lawmakers on Thursday that Cyprus poses a "systemic risk" that threatened to ricochet across the 17-nation eurozone.

Around the same time, Simon O'Connor, spokesman for European Union Economy and Euro Commissioner Olli Rehn, suggested that a chaotic, disorderly banking meltdown was conceivable with this unprompted remark: "The European Commission is convinced that a managed and orderly way forward is still possible".

An EU source speaking on condition of anonymity underlined that Nicosia had "until Tuesday" to broker a solid deal - suggesting that Cyprus might otherwise find itself kicked out of the eurozone.

In Moscow, Prime Minister Dmitry Medvedev slammed the European proposals to solve the Cyprus crisis as "absolutely absurd," further raising tension between Russia and the European Union.

Despite the large Russian holdings in Cyprus, the island's finance minister failed to make any progress in two days of Moscow talks to secure aid.

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