Emergency funds 'blunted crisis'

The Reserve Bank's temporary emergency liquidity facilities, most of which were withdrawn or amended yesterday, helped "take the edge off" last year's financial crisis in New Zealand, say banking industry figures.

The Reserve Bank said it would remove and consolidate some of the facilities, given that financial market conditions had improved.

The facilities were put in place as overseas markets, which our banks relied on for a large part of their funding, ground to a halt after Lehman Brothers collapsed 13 months ago.

A senior interest rate dealer at a major local bank told the Business Herald this year that he counted 28 consecutive days when his bank was unable to raise any cash through its usual overseas channels. That led, he said, to concerns about his bank's ability to fund its existing loan book, let alone any new lending.

"New Zealand banks are now able to readily access funding from the markets, and the usage of these special facilities has been very low in the last six months," Reserve Bank Deputy Governor Grant Spencer said yesterday.

Among the changes, the Reserve Bank will remove the term auction facility (TAF) where banks were able to borrow funds for three, six and 12 months using eligible collateral, such as mortgage-backed securities, registered bank bills and New Zealand Government securities.

PricewaterhouseCoopers banking partner Paul Skillender said the TAF, under which the banks borrowed several billion, and other facilities were "pretty appropriate for New Zealand circumstances at the time" and meant things never got as bad as they could have.

"The edge was taken off the funding crisis for us by having strong Australian parent banks and by having the various repurchase schemes and the wholesale and retail funding guarantees."

One senior banker said the cash secured from the Reserve Bank under the TAF was not cheap. While the applicable cost was described as "market rates", the banks took a "haircut" where the cash they received was less than the face value of the assets they placed with the Reserve Bank.

Spencer said the Reserve Bank "will continue to monitor markets closely and is in a position to supply sufficient liquidity as required depending on market conditions via its regular open-market operations".