The latest RBNZ review on monetary policy and the level of the Official Cash Rate brought this note from them:
The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding.
It seems a fair comment to make.
The margin between the average retail term deposit rates and wholesale rates has never been lower over the past 15 years.
While there isn't any financial law that says term deposit rate offers need to exceed the cost of wholesale funding, over this same period it has for most of the time. That history shows it has exceeded it by about +1% on average for both the six month TD offers (actual = +0.937%) and the one year TD offers (actual = +1.07%).
At present, average six month term deposit offers are -0.8% below the cost of six month wholesale money, and the average one year term deposit offers are -0.4% below the cost of one year wholesale money.
If both were +1% above the wholesale benchmarks, six month term deposit offers would currently be offering 4.40% pa and one year term deposit offers would be offering 5.20% pa. The highest offer from any main bank is now a full 1% pa lower than that.
Savers are motivated by higher term deposit interest rates. As they have risen recently, there has been a sharp shift from low or non-earning bank accounts back to term deposit accounts. Savers will shift when incentivised by a higher interest rate.
On the other hand, banks are commercially motivated and incentivised to keep offers low. Only competitive pressure will raise them. Some of that "competitive pressure" comes from the wholesale cost of money, some comes from the opportunities to lend, and some comes from savers who are prepared to shift institutions for a better rate. It is this last motivating factor that is the weakest. Banks rely of their 'replicating portfolio' - savers too lazy to make the effort to switch.
It is not as though there aren't higher offers from banks - they are just from challenger banks rather than "main banks". Savers have always seemed reluctant to support challenger banks in sufficient volume to cause main banks to change their behaviour. To be fair, because all challenger banks are small, and between them have less than a 10% market share, their capacity to take a volume of fund flows sufficient to affect the main banks isn't great. The main banks can rely of this incapacity.
Despite all that, the offers on the table at present are unusually low. The RBNZ is right to call them out. If the main banks can ignore the pressure from the challenger banks, will they also ignore the signal from the RBNZ?
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Despite all that, the offers on the table at present are unusually low. The RBNZ is right to call them out. If the main banks can ignore the pressure from the challenger banks, will they also ignore the signal from the RBNZ?
If bank shareholders are being imposed upon to put up more capital banks will seek to penalise the weakest and largest underwriter of bank loans - namely unsecured depositors.
Past time a depositors lobby association is formed.
To be honest, if we're facing an upcoming recession people won't be too worried about return. More about safety of their deposit and insurance is a good encouragement.
Besides, savers aren't necessarily looking for any return at all. I understand there's inflation risk to be concerned with but I believe this will be addressed in future. Inflation risk bleeding into ordinary life is a big concern, at least to me. Turns ordinary people into investors. Sometimes emotionally, out of fear of inflation. You don't invest emotionally, bad things happen.
But who has the money to save? The poor certainly don't and the middle class is now are going to be struggling to hold onto the homes. The only people who will continue to save will be the rich.
This is an essential watch right now. Gary Stevenson talking realistically about the global economy. https://youtu.be/ViY-zI3b5JQ
Household net savings can only come from government budget deficits as banks can only create credit and debt in equal measure and NZ runs current account deficits also which are a financial loss to us. Government debt is the private sectors accumulated savings of the governments currency. (Sectoral Balances).
Government budget deficits just mean that the government is putting more money into private bank accounts that it is taxing back again and then cancelling and which then leaves a surplus of money in the private sector. Whoever holds the governments bonds doesn't change this fact as they are not financing spending as the spending must happen before the borrowing. Government spending creates both an asset and a liability for banks who receive the governments payments as reserves but also then have to create the deposit in the payees account.
A couple of links for explanation below.
https://clintballinger.com/2018/11/13/decouple-spending-from-bond-sales/
https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…
I'm more interested in how it's performing as an alternative for currency. Actually, in currencies like AUD and USD, its performance is less compelling. As for JPY, wowser. 24% in past 12 months.
Incidentally, going out to 5 years, increase in JPY to gold is almost exactly the same as NZD -- 69% (JPY) vs 66% (NZD).
It hasn't nothing to do with it. The relative appreciation in NZD doesn't change regardless of the fiat equivalent.
Bloomie reports that gold is flowing East.
The Gold Market’s Great Migration Sends Bullion Rushing East https://www.bloomberg.com/news/articles/2022-10-09/gold-is-heading-east…
Nice. I've been keeping an eye on the 5 year rates but they haven't moved for a while. I'm guessing they are not going to go much higher as 5 years down the track the OCR should be back to some kind of normal? Unless there are other factors that will drive them up?
Correct. The banks have loads of FLP money for which they only pay the FLP rate (which is the OCR rate) but which is essentially long-term. Why would the banks want to pay the same or more for money which is shorter term? The RBNZ needs to look at themselves for the solution. And it is one reason why the OCR needs to move closer to wholesale rates.
KeithW
Banks create deposits when a new loan is issued.
Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source
In the case of FLP a securities repurchase agreement (RP) is undertaken between the two parties.
Banks in NZ and around the world are just another business ......they will always go to the "extreme" to maximise profits for return on shareholders funds.
Do you really think the Board sits around worrying about what savers are receiving on their term deposits/saving accounts.
In fact, savers/term deposits are a liability on their balance sheet, as they owe that money back to the savers, so of course they will minimise any interest paid on that money.
Sorry to break this to the general populace out there, as they will lend money "willy nilly" when the going is good, as up to 2021 but when they can see the "gravy train" has come to a stop ie 2022 and people just can't afford to buy houses anymore, that's when they raise interest rates. As they have to keep their cashflow going to get return on their capital - and most importantly a good profit and returns to shareholders.
The NZ banks make me laugh, as they are always saying how "robust" they are and yet they do not offer insurance in NZ for savers funds - so if your bank goes "belly up" so does your savings - gulp.
In fact, savers/term deposits are a liability on their balance sheet, as they owe that money back to the savers, so of course they will minimise any interest paid on that money.
Yet banks continue to push the virtues of savings in their marketing and brand campaigns. How they are allowed to contunue to do this under advertising standards is a mystery. I guess the disclaimers in small fonts on TVCs and marketing materials is enough to protect themselves.
There is a good reason why banks should be willing to pay more for retail deposits than wholesale funding, notwithstanding the material cost of maintaining such deposits. It goes back to funding stability ratios (sticky retail deposits) and the regulatory penalties that arise from relying too much on wholesale funding. But yes, the FLP is almost certainly to blame here, a taxpayer subsidy to banks effectively at the cost of retail savers.
Perhaps the trick would be in putting limits on where banks can get their capital from to do their business? During COVID the Government made a lot of money available to the banks very cheaply, and they pumped housing. There is no regulated, practical limit as I understand it, to just how much credit banks can create when lending into any market. Which means they can do as they please with impunity to all intents. If the banks need to attract deposits to produce the capital they require, wouldn't they then need to make it more attractive to depositors?
They need to maintain their deposits relative to lending though or their reserves will all end up in the settlement accounts of the other banks and they will no longer be able to make their interbank payments. Deposits and reserves go hand in hand even though they are not part of lending but of the payment system.
What is relevant is the HL rates relative to wholesale, not relative to OCR - the margin above wholesale is very small, 12m wholesale rates as as high as they were in December 2008 (4.6x%) when the 12m HL rate was 6.9% and 12m TD rate was 5.0%
The FLP is still a relatively small percentage of funding. The banks have $335bn+ in home lending, most on a 12 month repricing schedule and FLP is currently <$15bn right, so only a small chunk, and a few banks said they were using some of the FLP money for business lending, others said it was for new builds etc.
I get a sense that people overestimate the impact of FLP on fixed HL rates.
The low levels of new lending look to be forcing the banks to keep fixed HL rates low and therefore, swings and roundabouts, deposit rates.
That fact that kiwibonds look so attractive compare to what banks offer, when banks have not government guarantee, shows the banks are just making hay while the sun shines at the moment.
They need calling out on it, and IMO the media also need to call them out on it. If they are putting up peoples loans, then they should be putting up savings rates by similar amounts
Also the FLP needed to be scrapped yesterday, it is not needed and potentailly we are subsidising the banks with cheap money
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