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Just days ahead of reporting how New Zealand's financial system is coping with the credit crunch, the Reserve Bank has unveiled plans to regulate the size of banks' cash buffers and the maturity profile of their funding arrangements.
The Reserve Bank has released a draft liquidity policy for banks, saying: "Events in world financial markets have emphasised the importance of robust liquidity-risk management by banks, and have underscored our long-standing concerns about the liquidity and refinancing risks in the New Zealand banking system."
The central bank releases its second Financial Stability Report for the year tomorrow and liquidity and funding are again likely to be in sharp focus.
Until now, New Zealand has been one of the few developed countries without explicit regulations around bank liquidity.
PricewaterhouseCoopers partner Paul Skillender said the new regulations would effectively specify how much funding and liquidity banks need to have available to them over the next week, month and year and oblige banks to disclose more information about these settings.
The new regime would likely impose additional costs on some banks.
"Effectively the cost associated with having very short-duration funding is you've got to have liquid assets available that can cover the risk of that funding being withdrawn," said Skillender.
"The return you're going to get on holding those liquid assets is lower than the return you would get if you could lend that money out to your borrowers.
"To the extent you can structure your funding arrangements such that they are longer-term in nature, that in turn reduces the level of liquid assets you're going to have to hold under this new policy."
Maintaining adequate liquidity in the local banking system has been a major priority for the central bank since the credit crunch emerged over a year ago.
In recent months it has unveiled a series of measures intended to ensure that should the credit crisis become more critical, local banks can access sufficient ready funds to function properly.
One of the main measures has been the introduction of what is essentially a line of credit with the Reserve Bank which will accept high-quality residential mortgage-backed securities as collateral on loans.
The facility was unveiled at the Reserve Bank's twice yearly Financial Stability Report six months ago when Deputy Governor Grant Spencer also said the central bank would encourage or even direct local commercial banks to lengthen the maturity profile of their funding portfolio. At the time Spencer indicated the RBNZ wanted to mitigate the risk that banks' reliance of short-term markets for funding left them vulnerable to financial market shocks.
Since then, financial markets have worsened considerably, albeit they are showing early signs of recovery now.
In the draft liquidity policy, banks are given until the end of 2010 to comply as a concession for the difficult conditions they are facing.
The Reserve Bank is accepting submissions on its draft policy until the end of this year.
