"Given the US banks have been through a housing bust are very well capitalised and profitable, compared to the Australian banks that sit on very expensive collateral."

Mr McAlevey said the fund has paid close attention to the Hayne commission and said it could provide the catalyst in the form of tougher lending standards.

"The royal commission has shone a light on lending practices and could potentially tighten credit conditions when profitability is somewhat challenged and high US interest rates are having spillover impacts."

The comments came hours after Reserve Bank assistant governor Guy Debelle raised concerns about the impact for tighter lending standards to impact the health of the housing market.

He said if banks began using more conservative estimates of household expenditure it could reduce the percentage of credit extended to an individual borrower by about 30 per cent.

"One thing we do know is credit has been extended aggressively and rapidly and that is the single most important prop to for house prices. People will talk about demographics, supply, demand but I don't buy any of that."

The Australian banks have experienced a spike in short-term funding costs as short-term borrowing costs, measured by the bank bill swap rate, have increased sharply relative to short-term expectations of the cash rate.

The rise in the so-called BBSW/OIS spread has reflected an increase in the US dollar London Interbank Offered Rate (LIBOR), which is the benchmark rate that banks charge each other for short-term loans. LIBOR has been driven higher by increased US treasury bill issuance and tax changes that have led to a repatriation of US dollars out of short-term funds.


The Aviva AIMS fixed income fund which takes unconstrained bets in fixed income market was also shorting the Australian dollar versus the US dollar, which was particularly attractive given short-term US rates were now higher than Australian rates.

"That means you can short the Aussie dollar in US dollars and be paid for doing so. It's the first time in my career that that has happened."

He says a "rebalancing" in China could also lead to reduced demand for iron ore which would further weigh on the currency.

The combination of a positive carry on a short Australian dollar position, the impact of a China slow-down would force the currency lower, but he said if there was an issue for the banks you would see "record lows".

Mr McAlevey also warned of dangerously high exposure of Australian investors to the banks that dominate both equity and bond indices which are in turn linked the health of the housing market.

"This sounds like a very leveraged system that is kept together by the price of housing and housing alone.

"The risks to the economy would be of a level of magnitude that is not currently on most investors' outlooks."