Banks get a lifeline if crunch worsens

Page 1 of 2 View as a single page 5:00AM Thursday May 08, 2008
By Adam Bennett

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

The Reserve Bank yesterday moved to ensure the financial sector has enough cash on hand to function properly should the credit crunch get worse.

In its twice-yearly Financial Stability Report, it said New Zealand's financial system had so far withstood a severe bout of global market instability, but governor Alan Bollard warned that there were no guarantees the worst was over. While New Zealand's banks had very little direct exposure to the credit crisis, they had been affected by the global tightening in liquidity and availability of funds.

"Banks are now finding that the cost of this funding is going up and in some markets liquidity is still quite restricted."

Banks' difficulties raising funds on overseas markets, which provide about 40 per cent of their total funding, had in turn meant higher borrowing costs for businesses and households and could worsen the economic slowdown if credit conditions get tighter.

To partly address these issues, the Reserve Bank yesterday unveiled a series of measures to improve liquidity by extending the range of securities it would accept as collateral from banks seeking loans to include high-quality residential mortgage-backed securities and debt instruments issued by SOEs and local authorities.

"These could be provided as collateral for loans from ourselves should banks' normal sources of funding be disrupted in the future," said deputy governor and head of financial stability Grant Spencer.

"It's not responding to an existing emergency. It's a contingency that we're trying to cover here."

Bollard said the move was intended as "a lubrication of the system to keep it working smoothly".

"It doesn't relate to fears about capital adequacy in the system. We think that is pretty sound."

Yesterday's report contained a number of messages for the banks, said Spencer, including the instruction that they should lengthen the maturity structure of their debt, even if it cost slightly more to do so.

A month ago ratings agency Moody's warned that there were indications local banks were raising money on international markets on shorter terms, which was "increasing the volume of funding to be rolled over in 2009" and had the potential to affect some banks' ratings.

Moreover, Spencer said banks should diversify their sources of funding across different countries, markets and instruments.

He said the Reserve Bank had been working with the banks to develop a new prudential liquidity policy that was expected to be in place by the third or fourth quarter this year.

Finally, while acknowledging that banks should and were tightening up lending criteria, "they should not be putting up the lending shutters".