By Jenée Tibshraeny
Deputy Reserve Bank (RBNZ) Governor Geoff Bascand says banks’ computer systems aren’t set up to deal with negative interest rates.
He compared the situation to that at the change of the millennium when people were concerned about how IT systems would respond to the date ticking over from ’99 to ’00.
The comment follows the RBNZ earlier on Monday announcing the Official Cash Rate (OCR) will be slashed to 0.25%, from 1%, where it will remain for at least a year.
The RBNZ said an OCR of 0.25% was currently the “lower limit, given the operational readiness of the financial system for very low or negative interest rates”.
It said it would undertake a large-scale asset purchase programme of New Zealand government bonds, should more stimulus be required.
Speaking to interest.co.nz, Bascand said banks’ readiness for negative rates varies between institutions.
But for a number of them, their IT systems "aren’t ready and can’t cope with negative rates”.
“New Zealand hasn’t really contemplated negative rates in the historical period that we can think about. It’s a bit like a Y2K thing in a sense that they’re all set up to be positive, zero, or positive numbers," Bascand said.
“It doesn’t mean that you couldn’t create some work-arounds eventually, or adjust this, but right now [this] doesn’t seem to be the key thing to do.
“We’ve got other ways of putting stimulus into the economy if we need to. Taking on additional risk of doing something that may or may not transmit, or work properly, doesn’t seem like the smartest thing to do.”
Banks well-funded and don't need RBNZ help currently
In terms of banks’ liquidity, or their abilities to meet their financial obligations as they fall due, Bascand said, “We [the RBNZ] stand ready there to help them if they need that. But at the moment it looks absolutely fine in both the short and the longer-term end of their funding markets.”
He said banks are funded out for well over a year, as they have “way above” what’s required of them long-term.
In the shorter term, Bascand said they look “absolutely fine” for now. Yet he admitted he couldn’t predict what would happen in say three months’ time and whether shorter-term funding would be harder to replace.
“It all depends really on how markets function over the next few months as to whether at some point you get a little bit of dislocation, or some terms of borrowing aren’t available to them,” Bascand said, noting that short-term funding doesn’t make-up a large part of banks’ funding.
RBNZ not planning on creating temporary deposit guarantee scheme
Bascand said the RBNZ could “potentially” create a temporary deposit guarantee scheme like one that was created during the 2008 Global Financial Crisis.
“It’s possible. We don’t have any plans to do so at the stage because we think banks are in a sound and strong position and it’s not a financial crisis that’s affecting banks all around the world. It [Covid-19] is affecting the real economy - households and businesses,” he said.
“The big message is, the banks are well capitalised."
He said the Government is still committed to creating a deposit insurance scheme. Details around this, including which products it will cover, are still being consulted on as a part of the second phase of the Reserve Bank Act review.
Cabinet in December said the scheme would have a $50,000 limit, meaning someone with a $100,000 in a bank that collapses will only get $50,000 back. However someone with two $50,000 deposits in two banks that collapse will get $50,000 back from each bank.
This limit will cover 90% of individual deposit accounts and 40% of funds (reflecting that the vast majority of New Zealanders have deposits worth less than $50,000).
The design of the scheme, which will be funded by bank levies, is expected to be unveiled in the middle of the year.