KEY POINTS:
Whatever Reserve Bank Governor Allan Bollard has been saying to banks, it appears to be working, with fixed mortgage rates rising quickly.
Following the Reserve Bank's rate increase last month, Bollard told Parliament's finance and expenditure committee he was arranging meetings with the banks' chief executives "with some degree of urgency" to discuss their mortgage lending.
Bollard said he would discuss the low margins banks were earning on home loans, which were helping fuel house-price inflation, and the possibility he might force them to hold larger cash reserves to limit lending.
The Reserve Bank's attention to those issues should be read as a warning to the major banks, he said.
A Reserve Bank spokesman said while it was a matter of public record that Bollard was talking to bank chief executives about their mortgage lending, "he's not making any comments about the contents of those discussions".
But since Bollard began talking to the major banks they have increased their fixed mortgage rates, with all but the Bank of New Zealand charging 8.9 per cent for two-year loans and 8.6 per cent for five-year loans.
Last week the banks told the Business Herald the increases were the result of rising rates on wholesale money markets, but the increases have surpassed those movements.
As a result, banks' margins, which have been driven lower by intense competition for market share in recent years, appear to have expanded.
"Certainly wholesale markets have been going up but the margins the banks have been earning have gone from being something like 40 or 50 basis points up towards 100 basis points," said Massey University head of banking studies David Tripe.
ASB Bank chief executive Hugh Burrett confirmed he'd had recent discussions with Bollard "about the market overall".
"He's pointed out where he has concerns for the market in some areas. He certainly hasn't instructed us to get our margins back."
Burrett said ASB had begun lifting rates before the discussions, "because we have to get some margin back in the business".
However, he said more recent mortgage rate rises were partially a result of the discussion with Bollard.
"I wouldn't say it's a direct result of discussions we've had, but it's probably an indirect result."
Bank of New Zealand spokeswoman Brenda Newth confirmed BNZ did have a recent meeting with the Reserve Bank "at which we talked about a range of economic issues, including housing and the official cash rate".
Westpac spokesman Mark Watts said the bank had no comment to make about any link between discussions with Bollard and recent rate increases. ANZ National's chief executive Graham Hodges was unavailable for comment.
The Reserve Bank is likely to be particularly pleased with the increases in longer-term fixed rates. At 8.6 per cent they have increased by as much as 60 basis points since the beginning of March, when Bollard lifted the OCR by 25 basis points.
The effectiveness of the OCR has been blunted in recent years as more than 80 per cent of mortgages are now fixed. The problem has been exacerbated recently as those whose loans come up for refinancing increasingly choose cheaper, longer-term loans.
Of three measures the Reserve Bank is looking at to supplement the OCR, Bollard has said adjustments to banks' capital adequacy ratios are the most practical as such control is already largely within its power.
Commercial banks have to hold a minimum level of capital in reserve relative to their assets, including loans, to absorb losses. Requiring banks to hold larger reserves would restrain growth in mortgage lending.
On the up
* Fixed mortgage rates are rising faster than rates on wholesale money markets.
* This has coincided with a series of discussions Reserve Bank Governor Allan Bollard has been having with bank bosses.
* Bollard has been concerned banks' mortgage rates have not been rising quickly enough to dampen house price inflation.
* He wants to warn banks he is looking at alternative means of curbing house prices, such as increasing capital adequacy ratios.
