Investor disquiet is showing up in the share prices of the big four banks, writes Karen Maley.
As Australian investors watch the beatings being inflicted on European and US bank stocks, they might begin to question their long-standing conviction that local bank stocks are as safe as government bonds, with the bonus of much higher yields.
Investor disquiet is already showing up in the share prices of the big four banks - Commonwealth Bank, Westpac, NAB and ANZ - which have all shed more than a fifth of their value since the prices peaked almost a year ago. 
Analysts point out that Australia's banks are in solid shape with low levels of problem loans. But others note that continuing turmoil in offshore financial markets could bode ill for local lenders.
They argue that if investors continue to shy away from risk, Australian banks could be forced to pay more to borrow in offshore markets, which they would then pass on to their customers. This would trigger a rise in financial stress, especially among borrowers who've taken advantage of historic low interest rates to load up with debt.
Indeed, Australian households have the dubious honour of holding more debt compared to the size of the economy than any other country in the world, with a household debt-to-GDP ratio of more than 120 per cent.
Much of this extra borrowing has flowed into the property sector, helping to push house prices in Sydney and Melbourne to stratospheric levels, while leaving Australian home owners and property investors saddled with massive mortgages.
The country's banks, which have around 60 per cent of their loan portfolios in housing, leading some observers to label them as little more than glorified building societies, have competed vigorously to get a bigger share of this surge in home lending.
This has translated into deteriorating lending standards, with banks providing interest-only loans to unsuitable borrowers and making overly optimistic assumptions about the ability of borrowers to service their loans.
Last   October, Wayne Byres, who heads up the Australian Prudential Regulation Authority (APRA) attacked the mortgage lending standards of some banks, saying they had fallen to "horribly low levels" that "lacked common sense".
Some investors worry that if the housing market starts to run out of steam, the country's banks could experience a sharp jump in problems loans and write-offs.
Susan Lloyd-Hurwitz, the head of property group Mirvac, says the country's residential property market has passed an "inflection point" and is "set for a lower volume and price growth phase". And ratings agency Moody's Investors Service has warned more home owners are likely to fall behind on their mortgage payments this year as the housing market slows.
The Reserve Bank of Australia has pointed to the risks associated with the jump in lending to investors for buying residential real estate. It argues that a high level of investor activity in the housing market can exaggerate price rises, meaning significant price drops in future.
The residential property market isn't the only cause for concern. The RBA warns that risks are also rising in the commercial property sector, as strong demand from foreign local buyers helps push commercial property prices up sharply, even though leasing conditions are soft.
Banks could see a rise in problem loans if commercial property prices tumble, either due to rising global interest rates or, more likely, a fall in foreign buying.
There's an additional risk if Australia's credit rating is downgraded over concerns about mounting budget deficits and the ballooning current account deficit, especially if Australia is stripped of its coveted triple-A rating. This week Treasury secretary John Fraser pointed to the risks that heavily indebted governments and households face when US interest rates eventually rise to more normal levels.
"If interest rate costs go up, it makes you vulnerable because you're less able to protect yourself if things go foul," he told a committee hearing in Canberra this week.
In sombre testimony he noted countries with a lot of debt were increasingly becoming "hostage" to their burdens.
Ironically, the very success of the big four banks in capturing market share and swallowing up their weaker rivals has created a further risk - the country's highly concentrated banking system.
As the final report of David Murray's financial system inquiry noted, the big four banks pursue very similar business models, which increases the risk of contagion in a financial crisis, as problems in one major bank are likely to spread to other financial institutions.