Alan Clarke: Beware of perfect storm

Banks have dished out almost $200 billion in property loans.

Do you have quite a bit of your money in a single bank? Are you one of those conservative people who has all their money in a bank? Do you feel that banks in New Zealand are safe? I used to think that they were, but now I'm not so sure. In fact, I think a "perfect storm" could be brewing ...

NZ Banks

Banks in this country have loaned out $198 billion on housing, and much of that money has gone into a scarily overheated Auckland property market.

In addition to housing, NZ banks have loaned $54 billion to farmers, many of whom are facing really low milk fat prices and will most likely run at a loss this year.

To fund this borrowing, our banks have in turn borrowed $132 billion from lenders offshore. It seems that they have not learned from the global credit crunch in 2008 and 2009, which was largely created by excessive lending into an overheated property market in the US. This is a scary lesson not to learn, as banks in New Zealand are back to lending up to 95 per cent LVR.

Auckland property

If the Auckland property market crashes, or even drops by 10 per cent, the aftermath will create all sorts of problems, and some borrowers will fall over.

If the borrowers who are forced to sell their property have negative equity, they will still owe money to the banks, money that the banks won't be able to recover.

How much can the banks lose and survive?

"Those who do not learn from the past are bound to repeat it." Again, I have to ask, have we already forgotten what happened to the US and European banks in 2008 and 2009?

Dairy farmers

Many farmers have massive debt and will rely on their huge overdrafts (amounts up to $300,000 are not uncommon) to keep them afloat this year.

So, what if the milk price does not recover next year? How much will Kiwi banks lose if dairy farm values fall? How much loss can they recover from?

Banking stress tests

It's no wonder the Reserve Bank is so concerned that it runs a "stress test" for banks. The last one, in 2014, concluded that most New Zealand banks could survive two major adverse effects. This is all very well, but that was last year. Even our best and brightest minds cannot envisage every scenario, especially "left field" events that come out of nowhere. No one foresaw the Christchurch earthquake, the sharp fall in dairy prices, the Auckland property bubble, or the PSA disease in Kiwifruit orchards. No one.

Haircuts

It appears that if a bank does get into serious trouble, it will close one day and reopen the next under close RBNZ and government supervision.

If this ever happens, depositors and savers could take a "haircut" on their funds. Meaning that if you have $100,000 in the bank, you may get only $50,000 back.

I wouldn't ... Is it prudent to have all your money in one bank? Spreading it around to four or five banks is no better, either, since they all lend into the same markets and industries, and so are all exposed to the same risks.

Political inaction

Are John and Bill "fiddling while Rome burns?" They don't seem to be willing or able to control the Auckland property bubble.

Do we have a tired and ineffective third-term Government (which is pretty common), with far too much focus on the next election? It certainly looks that way.

In Summary

* A "perfect storm" could be brewing.

* The banks used to be very low risk, but now more caution is warranted

* If you have most or all of your savings in NZ banks, prudence may be smart

* One might worry that the lessons of 2008 and 2009 have already been forgotten

* The RBNZ is very concerned and with good reason

* We can't predict left-field events

* But the Government seems to be fiddling

* Diversify - it reduces risk, and it is free, too

Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at acfs.co.nz Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and is free.