KEY POINTS:
It's natural for New Zealand investors to get jittery as we watch big multinational banks fold like dominoes on Wall St.
However, the editors of banking and finance website interest.co.nz reckon we have no cause for concern.
They have outlined 10 reasons why they believe New Zealand's banks and US investment banks are like chalk and cheese:
1. Not yet 'past due date'
New Zealand bank customers almost always pay their interest bills on time. Currently only 0.12 per cent of New Zealand bank loans are impaired, whereas almost 6 per cent of US home loans are impaired or past their due dates. New Zealand bank impaired assets are much lower than they were in the early 1990s when banks were exposed to big commercial property lending losses.
2. Closer to the customers
Our banks deal directly with their mortgage and small business customers, whereas US investment banks trade and hold securitised debt written and assessed by brokers and other banks. Our banks often know exactly how much income a borrower receives every week and how much they spend, whereas the end holder of a securitised mortgage would be lucky to know the borrower's name, let along know their income or what the asset looks like.
3. It's personal
Customers of New Zealand banks can't walk away from their houses and leave the debt with the house. There's no point in sending the keys back to the bank here because the money is still owed personally to the bank. In the United States homeowners in 20 'non recourse' states, including California, Arizona and Nevada are handing their houses back to the lender and walking away without any debt.
4. Ratings count
New Zealand banks have higher credit ratings than US banks. The 'big four' New Zealand banks are rated AA and Kiwibank is rated AA minus. Lehman Bros, Morgan Stanley, Merrill Lynch and Goldman Sachs all had or have lower credit ratings. Only 28 banks globally have the AA ratings or better out of thousands of banks.
5. We keep it simple
US investment banks lent overwhelmingly to other banks and huge corporates. They used derivatives extensively to try to reduce their risks, but managed only to concentrate the pain when markets froze up and no one else wanted to lend to them. New Zealand banks almost exclusively lend simply to home owners and businesses. These loans are held on the bank balance sheets now and are much easier to understand.
6. Wall St incomes are way out of proportion
Any bond trader or merger and acquisition banker in their mid to late 20s for a US investment bank would earn 5 to 10 times more than the CEO of any New Zealand bank.
7. We have a watchdog
New Zealand banks are regulated directly by the Reserve Bank of New Zealand. There is no confusion and the way these banks operate is simple, confined largely to one market and transparent. US investment banks operated in a "shadow banking system' that was not transparent, largely unregulated and involved massive use of complex derivatives.
8. Fewer (potential) bed debts
Less than 1.5 per cent of mortgages in New Zealand are classified as near or sub prime, where borrowers don't have income documentation or have bad credit histories. More than 7 per cent of US mortgages are seen as 'sub-prime'.
9. They've "gone to the well" once too often
Investment banks have already exhausted the supplies of fresh capital to bolster their balance sheets. Sovereign wealth funds have already been burnt buying new shares last year that are now worth 60 per cent less than they paid for them. The Australian shareholders have not been called on yet to pump fresh cash into their banks.
10. The interest rate pain has been worth it
New Zealand interest rates have been much higher than US rates for the last 8 years, meaning the scale of easy and cheap lending to property investors and big corporate borrowers was less extreme here.
- INTEREST.CO.NZ
