Risk management, or the lack of it, is usually the key difference between the fortunes of banks when times get tough. History books are full of evidence of what went wrong after a financial calamity. That’s the easy part. The hard part is to foresee the problems. The high level of Australian household debt and interest only mortgages have received much attention of late. Spectrum sees another potential source of pain for Australian banks - the heavy reliance on mortgage brokers. Around half of the mortgage market originates from brokers. These agents can be far more financially motivated than bank branch employees to sell mortgages. The risk is, just like the pre-financial crisis in the U.S., controls and borrowers’ best interests are subordinated behind brokers’ financial gain. System-wide, this high reliance on brokers is a concern. At the individual bank level, it may also be a key differentiating factor in a bank’s financial health should Australian mortgage losses start to rise.