$630m dividend for Government

The Government received a $630 million dividend from the Reserve Bank last month, effectively reversing its injection of $600 million of additional capital into the bank in July last year.

The bank's annual report, tabled yesterday, shows that, like other central banks, its balance sheet expanded markedly over the past year - to $30.9 billion from $25.2 billion.

That reflected the need to inject funds into credit markets at the height of the crisis and in effect substitute sovereign risk as the private sector's appetite for risk evaporated.

The main change was the acquisition of nearly $7 billion in securities from the banks in the course of relieving liquidity pressures they faced.

Reserve Bank chairman Arthur Grimes said that had been successful and important both for maintaining financial stability and for ensuring that the bank's monetary policy response to the crisis - the fastest and steepest cut in the official cash rate ever - was effective. In other words it is no use cutting the price of credit if borrowers cannot access it.

Governor Alan Bollard said: "We now think we are through the worst. The banking system has held up reasonably well and the economy has not sustained major damage."

But he repeated warnings that the crisis had highlighted the imbalances and vulnerabilities of the economy.

Households had been consuming beyond their incomes and borrowing heavily for housing, much of it funded through relatively short-term foreign loans, reflected in a very large current account deficit.

"At some point the financial markets may become uncomfortable if New Zealand continues to run such large and persistent current account deficits," he said.

But so far the exchange rate had not been supportive of the shift in production towards the export and import-competing industries needed to improve the situation.

Bollard said the Reserve Bank was looking at increasing the amount of capital banks needed to hold to support their agricultural lending, and at ensuring they lengthened the average maturity of their funding.

It is also closely watching international regulatory developments including proposals for counter-cyclical capital requirements.