KEY POINTS:
The direct impact on the broader economy of the finance company sector's troubles is likely to be small because the sector makes up only a small part of New Zealand's lending and debt, says Goldman Sachs JB Were.
"It's easy to over-dramatise what's happening," said Goldman Sachs JB Were economist Shamubeel Eaqub.
"The sector is relatively small. I would be more worried about how much debt households have altogether."
One way the sector's difficulties could affect the economy is by reducing access to credit.
The finance companies served an important role in making credit available to segments of society that might not have access to more bank debt.
These were the households most exposed to rising costs for necessities such as food, petrol and electricity, as well as rising mortgage rates.
"However the sector is relatively small at 8.4 per cent of system-wide lending and to date the concerns have been limited to only a few participants."
Reserve Bank data (as at the end of June) showed that 26 per cent of non-bank financial institutions' total lending of $21.7 billion was to households for housing, 22 per cent for "property and business services" such as property development, and 20 per cent for consumer finance.
Those figures include the building societies but in the past few years they have come to represent only a minority of non-bank institutions' lending for housing.
Home loans by institutions other than banks or building societies have increased sharply from $2 billion in 2003 to $5.5 billion last year, outstripping house price inflation.
But that is dwarfed by the banks' housing loan portfolio which stood at $130 billion at the end of last year.
For consumer loans, however, the finance companies are as important as the banks as a source of credit.
The other main channels by which finance company failures could affect the broader economy is through the impact of wealth destruction in the sector on consumer spending by those affected, and on broader consumer sentiment.
But again, Eaqub argues, we need to calibrate the scale. The $11.4 billion households had invested in the finance company sector at the end of June represented only 6 per cent of households' financial assets, or 1.5 per cent of their total (gross) assets.
"The key issues are that finance companies tend to operate with thin equity and very high leverage, and quite often there is duration mismatch - their lending is for longer terms than their funding."
As at the end of June nearly half of their funding, $10.6 billion, matured between three months and a year while only $5.4 billion of their loans fell due in the same period.
This creates the risk of a "run on the bank" if funds are withdrawn before the loans they funded mature. Even without that, if lending rates remained steady while borrowing costs rose, contracting margins would increase the companies' borrowing requirements.
"There are some good quality finance companies but they will also have difficulty raising funds and may have to use their more expensive credit lines."
Goldman Sachs' modelling suggested a $1 billion loss of financial wealth would shave only 0.07 of a percentage point off growth in household consumption over the following year, Eaqub said.
What happened to household incomes, house prices and debt servicing costs would have a much bigger impact.
He expected economic growth to slow from 2.7 per cent this year to 1.1 per cent next year, under the influence of the Reserve Bank's 100 basis points of interest rate increases this year, a 10 per cent increase in petrol prices and a dwindling net migration inflow.
But the twin boost from the Fonterra payout and the Government's fiscal policy would avert any risk of recession.
COST OF COLLAPSE
* $1.2 billion of investors' money has been caught up in finance company collapses over the past 12 months.
* Finance companies account for just 8.4 per cent of lending in the financial system.
* Finance company deposits account for 6 per cent of households' financial assets.
* Finance companies have lent just $5.5 billion for home mortgages, compared with $130 billion lent by banks.
