KEY POINTS:
Banks have promised to relax mortgage repayment conditions for struggling home-owners as part of a deal with the Government guaranteeing their overseas debts.
Announcing the wholesale funding guarantee on Saturday, Finance Minister Michael Cullen said he had been assured responsible borrowers could "count on support from their banks" during the hard times ahead.
Westpac bank told the Herald it had assured the minister it had dedicated more resources to helping people who were struggling. It had told the Government it would not force mortgagee sales lightly.
BNZ chief executive Andrew Thorburn wrote to Dr Cullen saying mortgagee sales were a "reluctant last resort" which would happen only after exhaustive efforts to get people back on their feet. He sent a similar reply to a query from the National Party.
Dr Cullen said the major banks told him they would work with borrowers to avoid forced sales, provided the borrower could start making payments again within a reasonable time.
In its letter to Dr Cullen, the BNZ said it shared his concerns about the potential risks to New Zealanders paying off debt in challenging economic times.
If a customer was having trouble, the bank could help by:
* Changing the timing and frequency of payments
* Giving a longer term to pay back the mortgage or changing repayments to interest only
* Capitalising interest payments if there was an unexpected setback, such as redundancy, sickness or a marriage break-up.
BNZ spokeswoman Diane Maxwell said the bank had triggers to alert staff to people who missed more than one mortgage payment.
If staff could see someone was having trouble - for example, if they were frequently withdrawing cash from a credit card account - someone would contact them before they entered "debt paralysis".
Ms Maxwell said the bank tried to contact borrowers before debt spiralled and "they stop opening the post".
"If they do that it just gets out of control."
On Saturday, Michael Cullen said the Government would offer a wholesale funding guarantee facility to investment-grade financial institutions.
The scheme, which comes after the Government's guarantee of up to $1 million for retail deposits, will apply to individual securities issues, and will have a graduated fee which gets more expensive for banks with low credit ratings and the longer the guarantee is intended to apply.
Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said the primary goal of the banking guarantee was to help banks re-enter regular foreign markets to raise cash, though it could also apply to debt raised in New Zealand
There had been fears that New Zealand banks would have cash dry up as overseas investors stayed clear of any bank that did not have a Government guarantee.
The guarantee will be available to financial institutions with an investment grade credit rating and with substantial New Zealand borrowing and lending operations.
It will operate on an opt-in basis.
Dr Cullen said the guarantee's variable fee was designed to encourage the banks to apply for the guarantee where it was needed, and to use it only for as long as necessary.
The guarantee would apply to individual transactions, which would have to be approved by Government officials.
This would mean that, because of the extra cost in paying the guarantee fee, banks would want to apply for the guarantee only when it was necessary to ease fears of overseas lenders.
In other countries, governments have sought equity in the banks they guarantee, but Dr Cullen said this was not necessary in New Zealand.
In those cases, the banks had needed to be recapitalised, and no one in the private sector was willing to do it.
New Zealand's banks were fundamentally sound, he said.
Problems had been caused by the international credit crunch drying up funds.
Without that cash, banks could not lend and the economy could grind to a halt.
Dr Cullen said the scheme was a "necessary evil".
It was difficult to estimate how extensively the banks would use the guarantee and how much the Government would male in as fees, but Dr Cullen thought it could be around $1 billion.
It would be important not to spend that money, he said, as the Government might need it to cover the guarantee.
* The scheme
The wholesale funding guarantee facility, announced by Finance Minister Michael Cullen, is for investment-grade financial institutions in New Zealand.
The Government has already offered a guarantee for retail deposits to stop worried customers pulling money out.
The wholesale scheme is designed to apply to individual securities issues.
It includes fees that become more expensive for banks with low credit ratings and the longer the guarantee is intended to apply.
The total liability could be up to $450 billion, if banks chose to cover all their funding.
- ADDITIONAL REPORTING: NZPA
