KEY POINTS:
Finance Minister Michael Cullen says the New Zealand banking system is sound.
Dr Cullen sought to reassure investors in a speech in Auckland this morning shortly after news broke that Five Star Consumer Finance had become the seventh finance company in 16 months to be put into receivership.
Dr Cullen said the global financial system had been tested by a credit squeeze flowing on from concerns over the sub-prime mortgage market in the United States.
"Back in New Zealand, we don't have the same sub-prime mortgage problems -- our banking system is sound," Dr Cullen said.
"The riskier end of our financial sector is finance companies, where we have seen some troubles in the past year."
However, these made up a smaller portion of the overall system than sub-prime mortgages did in the US.
"There is no indication of the same sort of systemic issue (in New Zealand)."
Dr Cullen said this would be of little comfort to those who had lost money, but the changes proposed such as mandatory credit ratings should help make the risk/return profile of investments clearer in the future.
The international shake-up had led a wide re-pricing of risk.
This was complex because the growth of the derivatives industry had done a good job spreading risk.
"It is not entirely clear who is left holding which risks, creating some financial mist," Dr Cullen said.
"It will take some time for the mist to clear so there will be some uncertainty and volatility in the short term."
New Zealand had been indirectly hit by the international re-pricing of risk and there was still a danger that the volatility in the short term, through a lack of liquidity, could harm otherwise healthy firms, he said.
- NZPA
