Stay in the game, RBNZ tells lenders

Grant Spencer. Photo / Supplied

The Reserve Bank has called on major banks to "stay in the game" and continue lending to creditworthy businesses and other borrowers.

The central bank's exhortation, delivered with yesterday's Financial Stability Report, comes a week after business groups said many of their members were effectively being starved of the credit they needed to survive and grow.

RBNZ deputy governor and head of financial stability Grant Spencer had three key messages for the banks yesterday and No 1 was: "Banks should continue to lend to creditworthy borrowers and avoid any excessive tightening of credit conditions.

"This is an issue," said Spencer when asked if the banks were being too cautious in lending to businesses.

"We have seen a significant slowdown in lending to business and we think most of that is demand driven but there's also a supply issue. There's been a tightening of credit constraints and covenants and we're watching the situation closely to make sure that situation doesn't get too tight."

In response, New Zealand's biggest bank, ANZ National, said it recognised the importance of maintaining the flow of capital into the economy.

"Earlier this year we made a commitment to provide $4 billion in new lending to New Zealand farms and businesses. We are well on track to meet or exceed that target."

Spencer said the RBNZ was encouraging banks to make sure their actions were consistent with their words: "That they're staying in the game and continuing to fund the New Zealand economy."

While the RBNZ yesterday acknowledged "current conditions warrant caution" for lenders, Spencer pointed out the central bank and government had taken a lot of measures to ensure credit continued to grow, including cutting official interest rates, loans to banks using residential mortgage backed securities as collateral and the taxpayer-backed retail and wholesale funding guarantees.

However, the Employers and Manufacturers Association and Auckland Chamber of Commerce last week said their members were reporting difficulty in obtaining credit and at February's Jobs Summit, RBNZ Governor Alan Bollard warned banks not to underestimate "the amount of corporate anger that's out there currently with regard to the banking system".

A burst of new retail debt issues by corporates this year is widely seen as a reaction against tougher credit conditions imposed by banks.

Spencer said the banks had indicated they had already received the RBNZ's message, but "we don't always hear the same stories from their customers".

Spencer also said the RBNZ continued to have concerns about the level of debt in the rural sector in general and the dairy sector in particular.

"There's potentially a concentration of risk if you see a significant downturn in commodity prices," he said. "We've seen a drop in dairy prices but we've also seen a little bit of a bounce. We need to make sure banks have buffers in place to handle a more substantial shock ... in today's world you're never sure what's around the corner."

The RBNZ was in discussions with banks over the level of capital they hold to support agricultural lending.

THREE POINTS

The RBNZ's three messages for the banks:

* Keep lending to creditworthy borrowers.
* Keep provisioning up and maintain strong capital buffers against any further deterioration in the international markets.
* Seek more longer-term offshore wholesale funding to reduce vulnerability to further shocks.