Bollard tells banks to ease up

The key point in the Financial Stability Report is the Reserve Bank's friendly nudge to our biggest banks to be ready to start lending again to businesses.

The Reserve Bank's report identifies there has actually been a further tightening of credit standards by the banks since the end of December, despite an apparent turnaround in the economy.

Here's the key section on page 24 of the report below:

"As the domestic recovery progresses, demand for investment finance is likely to increase across the business sector and it is important that credit worthy businesses can access finance on reasonable terms.

The New Zealand banking system should be well placed to support the recovery, particularly in light of the improvement in funding in offshore funding markets.

While banks are likely to continue to a take a more cautious approach to lending practices, it is expected that they will be prepared to reverse some of the recent tightening in lending standards. The Reserve Bank will continue to monitor banks lending standards and general credit conditions through the recovery."

The Reserve Bank included a chart showing that credit had tightened in the last year for all sectors, with construction and retail trade sectors reporting the biggest worsening from their long term averages. The Reserve Bank did not specify what it would do if the banks did not ease up.

The banks are privately telling many business customers that the Reserve Bank's new Core Funding Ratio, which forces the banks to raise more funding from expensive local retail markets rather than cheaper 'hot' wholesale markets, is a factor in the tightening.

The truth is muddier. The banks and their shareholders are also keen to wean themselves off these hot money markets. The 'hot' markets aren't nearly as easy or cheap as they used to be.

But it's clear that the head offices of the big banks in Sydney and Melbourne are clamping down on lending growth to New Zealand businesses. This follows several years of lower profits from their New Zealand divisions and a drive, in some cases, to use precious capital in other parts of their banking operations. ANZ's push into Asia is certainly a factor in its reluctance to increase lending here.

The Reserve Bank could change the capital adequacy rules for businesses to encourage more lending there, but for now the banks seem keener to keep lending against housing than for businesses.

Bernard Hickey