Grant Spencer, the deputy governor of the Reserve Bank, gives his views on how the banking sector has fared against the global downturn - and how he sees the future.
KEY POINTS:
How have our banks coped so far with the credit crisis and what would you say to New Zealand bank customers alarmed by media reports of bank failures overseas?
Our banks and their Australian parents have coped much better with the global crisis than the big banks in the US and Europe. They do not have the nasty structured credit instruments on their balance sheets that the major international banks have had. Accordingly, their losses on bad assets have been small and there has been no need for Government to think about putting new capital into the banks as they have overseas.
Most of our banks rely on overseas markets for a large proportion of their funding. What is your view on the ongoing availability and cost of those funds over coming months and years and what effects do you anticipate this will have on households and the economy?
Yes, that is the area where our banks have been more exposed to the global crisis. The banks have funded New Zealand's balance of payments deficit in recent years and foreign investors have been very happy to lend - that is, up until the current crisis. Today those investors are far less willing to lend outside their home country and they are charging more to compensate for the risk. Going forward it is going to be much harder for New Zealand to run a large balance of payments deficit. And that may not be such a bad thing. It means that in years to come households will have to live more within their actual cash incomes. Of course the overall level of interest rates is falling here and overseas as central banks ease monetary policy. But there is no doubt that credit will be harder to come by in the years ahead.
How are our banks positioned in terms of their assets or loans to households and businesses? What particular areas do you monitor most closely and why?
Our banks generally have about half their assets in mortgages and the other half in corporate and commercial loans. Given the economic downturn, we are watching the banks' asset quality more closely. The areas where loan losses are most likely to grow are the likes of property development, the retail sector and agriculture, with the latter due to much weaker commodity prices. The banks can absorb quite a lot of loan losses, however, as they are well-capitalised.
There is considerable anecdotal evidence to suggest the availability of credit, particularly for businesses, has tightened to the point it is verging on credit rationing. What is your view?
Well, the system-wide data says total bank credit to business is still growing, albeit at a reduced rate. There is no doubt that businesses, like individuals, are finding it harder to get credit. But, as I said, this is to be expected given the global contraction of liquidity and risk appetite. And of course, the risky areas of the economy are going to feel this more. But, to me, the current situation does not look like a systemic credit crunch.
What are the advantages/disadvantages of having a largely Australian-owned banking industry in the present climate?
The good news, of course, is that the Australian parent banks are all in pretty good shape. That means the New Zealand subsidiary banks are well placed to weather the financial crisis. It is also worth noting that the parent banks have access to cheaper international credit than the NZ subsidiaries. So the parent funding coming through to the NZ banks helps to lower the overall cost of funds to our banks. In the current climate, therefore, the Australian parentage is a clear positive.
Is the Reserve Bank satisfied with the extent to which official interest rate cuts have passed through to mortgage and business rates offered by banks and what is the bank's view on current interest margins?
It is pretty clear that most rates paid by borrowers have not come down to the same extent as the official cash rate. The key reason for this is the increased margin now required by lenders - both here and overseas - to compensate for credit risk. For the same reasons, we have also seen an increase in the cost of funds to the banks, both in terms of deposit rates and the cost of offshore borrowing. So while lending rates have increased as a margin over the OCR, they don't appear to have increased relative to the banks' overall cost of funds.
