Les Phelps, a senior official with the Australian Prudential Regulation Authority (APRA), said in a telephone interview that relationships between Australian banks and the hedge funds were very modest and were immaterial to the stability of the financial system.

Asked if there were any concerns about Australian banks' total exposure to international hedge funds, which have racked up heavy losses in the past week, Phelps said: "No. There are very modest sort of relationships between the Australian banks and the hedge funds in the US."

In the United States, the exposure of major banks to a hedge fund that came close to collapse, Long Term Credit Management, has raised fears about the stability of the banking system itself.

Wall Street pillars including Merrill Lynch, Chase Manhattan and LehmanBrothers, and international banks including UBS, have acknowledge exposures totalling hundreds of millions of dollars to LTCM.

But Australian banks were not heavily involved in lending or dealing with hedge funds such as LTCM, said Phelps, the executive general manager (authorised deposit-taking institutions) at APRA.

He said that each of the major Australian banks, which have offices in New York, would have traded with the hedge funds which are important traders in foreign exchange and derivatives markets.

"That means that you have some transactions outstanding, so you have some settlement risk," Phelps said.

"But even those types of exposures were quite immaterial in any total sense (to the financial system)," he said.

Asked about the exposure of individual local banks, Phelps said some had no exposure, while for others it was minor.