The trend for economic risks facing financial institutions operating in Australia has turned negative according to S&P Global Ratings. This view led the rating agency, earlier this week, to revise the long-term ratings on a number of financial institutions operating in Australia from stable to negative. Outlooks on a further three financial institutions were revised to developing from positive. In a webcast explaining their actions, S&P analysts cited a possible increase in imbalances in the economy, through the twin pressures of strong growth in private sector debt and with an increase in property prices nationally."If a sharp correction in property prices were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks' lending assets secured by residential home loans," the rating agency said.S&P analyst, Sharad Jain, wrote in an article outlining his concerns that the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular, persistent current account deficits and a high level of external debt.A further source of risk cited by Jain during the webcast is S&P's assessment that the Australian government is highly likely to provide timely financial support to the systemically important private banks in the country, if needed. "Our ratings on the four major Australian banks and their core subsidiaries were already on negative outlooks reflecting the negative outlook on the Commonwealth of Australia; our ratings and outlooks on these banks remain unchanged."We consider that a sharp fall in property prices remains unlikely in the next two years, and such a scenario is only a stress-case scenario, in our opinion. "In addition, notwithstanding our view of a trend of rising economic imbalances in Australia, in our base case we consider these imbalances will unwind in an orderly manner, as has generally been the case over past property cycles." In line with recent trends, the growth in private sector debt and property prices will moderate and remain at a relatively low level in the next two years, said S&P. "We believe that increasing apartment supply in Sydney and Melbourne, regulatory pressures on lending practices and capital, and recent trends - including declining sales volumes in the secondary market - should help moderate the growth in property prices and household debt."Nevertheless, Jain raised an alternative case: "We consider that there is a one-in-three chance that the strong growth trend will resume. In our opinion, the likely low interest rate environment, continued demand supply gap for housing in Melbourne and Sydney, a relatively benign economic outlook, and Australian banks possibly targeting higher lending volumes (to offset pressures on their earnings growth) could stimulate a continued build-up of the imbalances in the economy.The danger here is, of course, that a sharp decline in house prices in any country is generally accompanied by a weakening of other key macroeconomic factors, such as unemployment, household expenditure, corporate investments, and total economic activity. In Australia's case, its external weaknesses could amplify the