We'll bleed more than Australia, says banker

New Zealand has far more to lose from an Australian bank failure than Australia has from a Kiwi collapse, whatever the IMF might think, says Reserve Bank deputy governor Adrian Orr.

But he says the risk of any collapse is being minimised.

Orr's comments follow an International Monetary Fund report which said that if any of New Zealand's four major Australian-owned banks struck financial difficulties, it would have a disproportionate effect on the parent across the Tasman.

"Contagion effects from New Zealand banks to Australian banks could be more severe than indicated by the relative size of their balance sheets," the IMF said in a report on the Australian banking industry.

"If there were to be financial difficulties in a New Zealand subsidiary, the effects on Australian banks could be material."

Even if threats to the parents' cash reserves were averted, the "reputational cost" of the failure of a New Zealand subsidiary or branch would be substantial, and could affect the parent bank's external funding.

Yesterday, Orr said the four major Australian banks owned 80 per cent of New Zealand's banking assets, which accounted for 10 to 15 per cent of their assets.

"On these figures alone, New Zealand is more vulnerable to changes in economic and financial conditions, and policies, in Australia than vice versa," he said.

Developments in New Zealand could affect the value of the Australian banks in the event of an "asymmetric" economic shock - one directly affecting New Zealand and not Australia.

But the Reserve Bank ensured New Zealand-registered banks "are adequately capitalised to weather most unexpected shocks, and behave prudently in the first place".

It also had IMF-endorsed policies and procedures "that aim to, among other things, manage the exposure across borders and between parents and their subsidiaries", said Orr.

"If a foreign bank's operation in New Zealand is large, we insist that the bank is locally incorporated, providing legal certainty over assets and liabilities and management responsibility," he said.

Legislation going through the New Zealand and Australian parliaments would improve the legal certainty necessary to ensure a bank failure could be managed as best as possible.

"If it is passed, both countries will have to have regard to each other's financial stability when formulating and implementing policies, including crisis management."

ANZ, which bought the National Bank from Britain's Lloyds Bank in 2003 for $6 billion, has the largest exposure to the New Zealand market.

It makes about 18 per cent of its overall profit in New Zealand.

ANZ reports its first-half result today.

Westpac makes about 14 per cent of its net profit in New Zealand, and National Australia Bank and Commonwealth Bank of Australia make about 10 per cent of their profits through their BNZ and ASB Bank subsidiaries.

The IMF report noted that bank operations on both sides of the Tasman were dominated by lending on home mortgages, and as deposits had fallen they were more dependent on international money markets for funding.

Australian banks obtained 27 per cent of their funding on international markets, a high level by international standards.

The IMF said lending practices of New Zealand's banks had followed the lead of their Australian parents.

Competition in the mortgage market had led to falling lending standards, and no-downpayment loans and low-documentation loans were becoming more common.