RBNZ reviews rules on liquidity

Finance company trustees, who have come under fire for their perceived lack of action during the sector meltdown, may be given the responsibility for setting minimum liquidity levels for their clients under new rules being formulated by the Reserve Bank.

The RBNZ yesterday released a discussion document seeking input on proposals for a new liquidity policy for non-bank deposit takers including finance companies.

The RBNZ points out the key liquidity risk finance companies face is that of a maturity mismatch where more deposits must be repaid to investors in a given period than can be funded by repayments of loans falling due over the same time.

That was not a problem when companies could raise new funds to cover any shortfall, but the finance company meltdown undermined investor confidence, limiting firms' ability to raise new funding.

That meant finance companies' ability to meet liquidity requirements was " predominantly dependent on the successful repayment of their loan book assets".

The RBNZ notes consumer finance companies did this more successfully than property financiers whose loan assets proved to be "highly illiquid in a stressed market".

Outside of the finance companies, saving institutions such as building societies and credit unions "have generally held high levels of depositor confidence and accordingly liquidity has been managed by the reliance on high levels of reinvestment".

The Reserve Bank has proposed three options for a new liquidity policy, the first being continuing with the status quo.

The second would see the Reserve Bank providing definitions by which liquidity could be measured, and trustees would determine the appropriate level of liquidity they required firms to maintain.

The third option is a more prescriptive arrangement where the RBNZ would set minimum liquidity levels.

PricewaterhouseCoopers' banking partner Sam Shuttleworth said the formulation of minimum liquidity settings would be a difficult task given the fairly wide range of activities undertaken by finance companies.

"With the finance companies there is the risk that one rule doesn't fit all," he said.

Allowing trustees to set minimum liquidity levels would allow them to tailor settings appropriately.

Submissions close on March 15.