Australia’s broad market index, the ASX, recently closed at a four-month low as the banks it includes have fallen by 15% since hitting a one-year high in March. With banking regulators introducing a new loan restrictions to cool off an overheating property market, plus forcing the country’s major banks to raise capital, investors worry that profit margins will be squeezed. Throw in a healthy dose of scandal, it’s no wonder investors are nervous.

Australia is known as relatively prudent and fiscally sound country. If we were to play a word association game and I said, “Machiavellian,” the first thing to come to mind wouldn’t be “Australian bankers.”  But that’s exactly how a recently study from Macquarie University (based in Sydney) described some of them, saying that chief executives of many Australian banks are ignorant of scheming and ethical breaches in their organizations.

That academic judgement follows on the heels of several scandals in the country, with wealth managers selling shady products and manipulating the country’s benchmark interbank borrowing rate.

The Australian Securities and Investments Commission says it is working to rein in that behavior, and the Australian Prudential Regulatory Authority (APRA) is cracking down on investor loans in real estate, which now make up about a third of the country’s mortgage market. In some cities, speculators are driving prices up to the point that owner-occupiers simply can’t afford to buy.

There are fears in Australia of a U.S.-style housing bubble. While Australia dodged our real estate bullet in 2008, largely thanks to conservative lending standards and an effective regulatory regime, home prices in the country’s biggest cities have soared 40% or more over the past three years.

Earlier this week, Treasury Secretary John Fraser said that Sydney was “unequivocally” in a housing bubble, a clear sign things are overheating. A housing crisis would be particularly dire today, given major banks’ reserves against potential loan-losses have plunged since 2008.

However, most Australian banks are working on stricter criteria for investor loans. They are cutting interest rate discounts and raising down payments from as little as 5% just a month ago to as much as 20% today. APRA is also pushing banks to raise more capital to buffer themselves against losses, with the “Big Four”  banks alone expected to raise between $17 billion and $31 billion.

Good News

So the good news is that Australia has benefited from proactive regulators in the past and is continuing to do so. While investors are clearly disappointed in the banking sectors performance, regulators are protecting both the Australian economy and investor returns by slowing deflating the mortgage bubble. And Australian banks are still quite strong relative to many other global banks.

The average loan-loss ratio, a measure of soured loans versus performing ones, at Australian banks remains at cyclical lows, though they are picking up in the major cities. As a result, Australian banks on the whole aren’t suffering from a capital crisis yet. Add in the addition funds that they are in the process of raising and they’ll be able to survive anything short of a total collapse in real estate prices.

And the Big Four banks have already been tightening lending standards for a couple of months.

The best news is that while Australian bank shares are off, the banks themselves are still quite strong. That means they should get a boost down the road as the markets realize that a real estate bust isn’t going to trigger a banking crisis, so the banks will continue to turn in steady-if-somewhat-slower growth. That also means that their dividends still have room for growth along with earnings.

The takeaway here is don’t bailout on Australian banks, since there doesn’t appear to be a government bailout necessary in their future. They’ve simply hit a cyclical turning point in their business which, thanks to on-the-ball regulators, shouldn’t turn into a crisis. Most Australian banks have also been diversifying over the past several years, adding ancillary services such as wealth management and insurance produces, creating additional streams of fee income. And if you focus on the strongest and healthiest banks, you can pick them up at extremely attractive yields right now.

Portfolio Updates

Australia & New Zealand Banking Group, one of our legacy Australian Edge portfolio holdings, has taken it on the chin and is currently down by more than 7% so far this year. But so far, the bank looks to be as secure as ever.

In the first half of fiscal 2015 the bank’s loan volume was up 10% while its deposits grew by 12%. The overall credit quality of its loan portfolio also improved, with bad and doubtful debts down by 3% year-over-year to just 0.19% of average gross loans. The bank’s operations in the Asia Pacific also surprised to the upside as profits grew 39% versus the second half of 2014.

Of the “Big Four” banks, Australia & New Zealand Banking Group is probably the most diversified, operating in 32 global markets. That, coupled with the bank’s strong underwriting standards on loans, leaves it well positioned to weather any turbulence in the Australian real estate market even as it can deliver solid long-term growth.

Australia & New Zealand Banking Group remains a buy up to $34.