AAP, with a staff reporter
The Reserve Bank of Australia says global financial conditions have improved significantly despite the new uncertainty created by the sovereign bailout of Cyprus in recent weeks.
In its twice-yearly Financial Stability Review, the central bank said the eurozone's commitment to resolving its government debt and banking problems has boosted confidence.
An improvement in the United States 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 eurozone countries.
However the RBA believes the eurozone 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.
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 to say whether the improvement 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 positions.
"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.
Big banks eyeing Asia
Exposure of Australian-owned banks to Asia was $112 billion in December 2012, up $27 billion from five years earlier, the RBA said.
Almost all of the increase is accounted for by the big four Australian banks.
The RBA said the key motivation for the banks' move into Asia is the large and growing trade and investment flows between Australia and Asia.
"Accordingly, the banks have been focusing on providing cross-border banking services, such and trade finance and foreign exchange, to their corporate clients engaged with trade and other business in Asia, as well as to Asian companies with businesses in Australia," the RBA said.
"Some of them have also been targeting foreign companies doing business in Asia, aiming to capitalise on the large and fast-growing intra-Asian trade and investment."