KEY POINTS:
Fears are held that sound finance companies could collapse as they are caught up in turmoil hitting the sector.
At the same time a call has been made for the Reserve Bank to act as lender of last resort to "good" finance companies to shore up investor confidence.
It was revealed yesterday that Five Star Consumer Finance had called in the receivers, making it the third finance company to collapse within nine days and the seventh in 16 months.
David Tripe, director of the Centre for Banking Studies at Massey University, said some finance companies may now be forced to close their doors even though they may have assets substantially greater than the amount they owe depositors.
"There is a real risk that a potential panic will knock over companies which are otherwise sound, but which are temporarily a bit short of cash," he told Radio New Zealand today.
"It will start to significantly impact on the supply of finance in various areas.
"That means it may be much harder to borrow money to buy used cars. It may be much harder to get small loans for various purposes. It may be harder to get loans for property development, and that would start to have some wider economic consequences."
Shareholders Association chairman Bruce Sheppard said the number of collapses, in terms of the finance sector, was as bad as the 1987 sharemarket crash.
"It's taken 20 years for retail investors to have some confidence in reinvesting in the share market, and even that's patchy.
"I'd say this series of collapses in the finance sector will have knocked retail investors' confidence in buying finance company debentures for probably a generation," Mr Sheppard said.
It was not inevitable a domino effect would continue to hit the sector, but depositors needed to be reassured.
The Reserve Bank was probably in the best position to do that, saying to other markets, "we are the lender of last resort to good finance companies", and to say which companies it was prepared to do that for, Mr Sheppard told Radio New Zealand.
Finance companies should for the past year have been husbanding cash and building liquidity and tightening lending criteria.
Few did the latter but many had been building liquidity, meaning they had cash available to pay people who wanted their money back.
Philip Macalister, publisher of personal finance website depositrates.co.nz, said some big finance companies had $100m of cash or more in bank accounts.
"The big companies, and some of the ones with a bit more grunt, if you like, have been preparing for this circumstance for a number of years," he said.
"They've been hoarding cash."
So if investors did stop lending money to the companies, they had enough cash available to run the company, ensuring they did not fall over, Mr Macalister said.
"The worst thing that everyone can do is try to pull their money out of finance companies all at once. If they do that they're imperilling the whole finance company sector."
- NZPA
