KEY POINTS:
The market turmoil that has affected banks' ability to raise funds and prompted the introduction of a wholesale funding guarantee over the weekend is far from over and ANZ National Bank says more bad news is likely.
As anticipated, New Zealand followed Australia's lead by introducing a wholesale funding guarantee for banks over the weekend.
The guarantee will mean New Zealand banks will not be disadvantaged when seeking to raise funds on offshore markets in competition with rivals from countries that have already introduced such measures.
The New Zealand scheme has been introduced just as key markets, including the US and European commercial paper markets, are showing some signs of recovering from the paralysis they suffered as the credit crisis deepened alarmingly during September and October.
ANZ National Bank chief executive Graham Hodges told the Business Herald a couple of European institutions with government guarantees had recently raised funds on relevant markets at rates far less punitive than seen over the last two months.
Furthermore, equity markets have been marginally more positive in recent days with the NZX-50 enjoying its fourth consecutive positive session yesterday.
However, Hodges indicated he expected further bad news out of the US financial sector and markets would continue to be choppy for some time to come.
"The news isn't all out."
"We haven't heard much yet out of the hedge funds, many would have cash pressures."
Hedge funds are typically extremely aggressive investment vehicles that are often highly leveraged and are largely unregulated. Some of them are huge.
Meanwhile, Hodges said it was too early to tell whether his bank would use the government's wholesale funding guarantee.
"The issue for us is it depends on how much a Crown guarantee is worth in the market which is yet to be tested."
Westpac said it was still assessing the details of the scheme, "and our view of its pricing will largely be determined by the reaction of investors into the wholesale funding market".
The guarantee is comparatively costly compared to the Australian scheme, and KPMG's Godfrey Boyce said Treasury and the Reserve Bank which drafted the scheme were clearly sending a message to the banks.
"They're there to cover the immediate crisis but they don't want to be there for the long term once the market is back to normal, and the pricing reflects that."
Banks rated "AA" will pay 140 basis points on funding over one year in term which is twice the fee the Australian Government is charging its own banks with the same rating.
Banks rated below this will pay more, with "BBB" rated banks which include TSB Bank paying a whopping 250 basis points for money with a maturity of a year or more. However TSB Bank chief executive Kevin Rimmington said this was not a problem as his bank which has more than enough funding from its retail deposit base is unlikely to make use of the scheme.
PricewaterhouseCoopers partner Paul Skillender said the comparatively high cost of the local scheme meant New Zealand's banks would probably look to their Australian parents to provide wholesale funding at lower cost, or else they would try to raise more retail deposits. They may even raise funds on offshore markets without the guarantee.
Banks that do raise funds on offshore markets backed by the government guarantee will be at a slight price disadvantage to their Australian counterparts
"In one sense the government have removed the inability of banks to raise funds, if there ever was one because of a lack of a guarantee, but in removing that they've introduced an additional cost that doesn't exist in the Australian scheme. The risk is that those higher wholesale funding costs in New Zealand may ultimately flow on to borrowing costs for borrowers."
THE COST
* Banks rated "AA" pay 140 basis points on funding over one year.
* Banks rated below this will pay more, with "BBB" rated banks which include TSB Bank paying 250 basis points.
