Moody's puts NZ banks on notice, probes offshore funding

The reliance of NZ banks on overseas funding has come under the spotlight by Moody's. Photo / Thinkstock

Ratings company Moody's Investors Service has put New Zealand's banks on notice of a potential downgrade as it looks into the wholesale funding arrangement used by them and their Australian parents.

Moody's yesterday flagged it's looking into the structural sensitivity of Australasian lenders to wholesale funding market conditions. The probe into the Australian parents will have a large impact on New Zealand's banks, it said.

"Foreign currency wholesale funding comprises around two-thirds of the New Zealand banking system's wholesale funding profile," said Marina Ip, Sydney-based assistant vice president at Moody's.

"An increase in offshore issuance was evident at the end of 2008, driven by the increase of medium-term notes that carried the New Zealand government guarantee."

New Zealand lenders' reliance on offshore funding, which accounts for some 40 per cent of total funding, "results in a low liquid asset coverage of their respective wholesale liabilities," Ip said.

The threat comes after the Reserve Bank of New Zealand's tougher prudential and liquidity requirements came into effect in April last year, with lenders required to source more domestic funding, and lengthening the term of offshore funding. The four major banks said they were comfortably meeting the core funding ratio.

One of the ways New Zealand banks have been getting around the funding issue is by selling covered bonds, which put up a pool of mortgages as a secondary guarantee for investors. The securities are banned in Australia, but are popular in Europe, and in New Zealand, BNZ and Westpac have already tapped the market.

New Zealand's foreign indebtedness has been a bone of contention for the government, which set up the Savings Working Group to look at ways to improve national savings. Privately-held debt makes up the bulk of the external liabilities, with corporate debt at almost $221 billion, or 116 per cent of GDP, as at the end of September. Total debt is $252.5 billion, or 132 per cent of GDP.