A wrap of all the tricks the Reserve Bank's pulled out of its bag (so far) to keep cash flowing through the economy 

A wrap of all the tricks the Reserve Bank's pulled out of its bag (so far) to keep cash flowing through the economy 
Christian Hawkesby

The Reserve Bank (RBNZ) has been rolling out a series of programmes in recent weeks to encourage banks to keep lending.

The “banker of banks” is doing what it can to support liquidity - or help banks and other market participants convert assets or securities into cash as they need to.

Put another way, RBNZ Governor Adrian Orr said the RBNZ has been trying to “keep the cash-flow moving around the economy - between banks, firms, households, and the government”.

Here’s a break-down of what the RBNZ’s doing:

Open Market Operation for Corporate and Asset-Backed securities

Banks will from Tuesday be able to swap their holdings of “Corporate Paper” (big business debt issuances typically with shorter maturities) and other “Asset Backed Securities” for the RBNZ’s cash.

Assistant Reserve Bank Governor Christian Hawkesby told interest.co.nz the corporate paper market “isn’t functioning well” at the moment. Market players are stepping back and corporates aren’t seeing this as a reliable source of funding.

By the RBNZ giving banks the opportunity to exchange corporate paper for cash in a repurchase agreement, it’s encouraging banks to support the corporate paper market. This in turn enables corporates to keep issuing this form of short-term debt.

“It’s a way for us to support the corporate market, help them manage their cashflows and to do that through the usual channels through their banks,” Hawkesby said.

The RBNZ will offer up to $500 million a week as a part of this programme. It will review the programme in 12 months’ time or sooner if demand diminishes.

Hawkesby said: “It’s unclear to us how much the facility will be used… In some ways, just by providing this backstop, it should help the market to function more normally.”

Because the programme is targeted at supporting securities with short, three-month terms, he said they could be rolled over during the 12-month period the programme is in place.

Offer to purchase NZ government bonds near maturity

The RBNZ on Monday started offering to buy back New Zealand government bonds that are due to mature on May 15, 2021, on behalf of the New Zealand Debt Management Office - the issuer which is part of the Treasury.

Hawkesby acknowledged there were investors who would like to be able to liquidate these bonds so they have cash available.

While he doesn’t expect all investors to sell the RBNZ these bonds, the buyback programme could help liquidate a sizeable portion of the $11 billion on issue.  

“When a government bond matures, the government has to pay back the investors their principle and then that becomes a huge cash injection all at once if it occurs on the maturity date,” Hawkesby said.

“By us purchasing the government bond back early, we’re effectively smoothing out that cash injection through the lifetime as we’re purchasing it back from investors.

“It’s something that we’ve done in the past.”

Large Scale Asset Purchase programme

The RBNZ on March 23 launched a Large Scale Asset Purchase or quantitative easing programme.

It will buy up to $30 billion of New Zealand Government bonds over 12 months on the secondary market (IE from banks and others that already hold these bonds).

By buying government bonds, the RBNZ increases demand for these bonds, which in turn reduces the yield on these bonds.

Because a number of the interest rates in the economy are calculated off the yield interest rates for government bonds, a move to reduce these rates will enable retail banks to lower their mortgage and business lending rates. This encourages people to spend, stimulate the economy and keep inflation and employment near their targets.

Investors (including retail banks) also receive a cash injection when they sell government bonds to the RBNZ.

Term Auction Facility

The RBNZ from March 20 started offering banks loans with three, six or 12-month terms.

It is taking government bonds, residential mortgage-backed securities, and other bonds as collateral.

The aim of the facility is to ensure banks remain well-funded. It also prevents the cost of bank funding from increasing, which in turn keeps interest rates for businesses and households low.

While loans of up to $2 billion are available at each daily auction, Hawkesby said only about $1 billion has been taken up to date.   

“It hasn’t been taken up at scale at this point. We think it’s largely banks checking they’re operationally ready to use it, when they do need it,” he said.

Loosened capital rules

The RBNZ has given banks a year’s leeway before they have to start holding more capital, in line with new rules announced in December.

On March 16 it announced banks will only have to start making their seven-year capital transitions on July 1, 2021, instead of July this year. The RBNZ says this will free up an extra $47 billion, which banks could lend.

And on March 24, the RBNZ announced it is reducing banks' Core Funding Ratio from 75% to 50%. The Core Funding Ratio requires banks to meet a minimum share of their funding from retail deposits, long-term wholesale funding and/or capital.

This is in part being done to support banks as they give mortgage holders affected by COVID-19 the option of deferring their repayments by six months.

All of these measures have been taken in addition to the RBNZ’s Monetary Policy Committee on March 16 slashing the Official Cash Rate by 75 basis points, to 0.25%, and stating it will remain here for a year.

In summary, Hawkesby said: “A key message here is that New Zealand banks are very highly capitalised and have very strong liquidity positions. They are in a very strong position to manage the shock that the economy and the financial system is facing.”

He emphasised that the RBNZ is simply supporting the banking system so it can keep doing its job.

More will be needed

Kiwibank chief economist, Jarrod Kerr, said there was now “plenty” of liquidity in the market, with around $21 billion cash in the system, compared to around $7 billion in “normal” times.

“What fund managers and banks are actually seeking, is an outright buyer for credit,” he said.

“As a next step, we'd expect to see the RBNZ become active in buying council (AKL, LGFA) debt and maybe Housing NZ debt (although very small market). Then corporate bonds will possibly be added in any further bouts of stress.

“So far, it's fair to say the RBNZ is successful in calming markets.”

Likewise, ANZ strategist, David Croy, said he believed the RBNZ’s programmes will be effective in easing market pressures, but “rollover risk for large issuers remains a pertinent issue in some segments”.

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24 Comments

I think the biggest problem is going to be the paradox of thrift problem.

Our economy was based on good vibes from a broad based delusion of growth forever. People willing to take on bigger and bigger bets to get some of that new wealth or income.

The run of good luck came to a shuddering halt over the last couple of weeks. The illusion of “growth forever” was shattered in a flash, and now the feedback loop flows the other way.

Most have just taken a 20% pay cut and are dreading the carnage that awaits when they get back to their workplaces in several weeks time.

The house renno, new car, flat screen etc. are on hold, and the near term essentials are pondered over carefully. This is the big challenge that our central bank and the govt. face.

Bill English should have let the RBNZ have their DTI rule so they could put more cash in without it going to houses. At least then some of those folk would not need to ponder as much having been part of this "growth forever".

Yip as the squeeze comes on over the next 6 months or so there will be many people awakening from the debt binge thinking, what the hell have I done?

I have friends with over a million in mortgages across multiple properties. The risk now is rising interest rates, falling asset values, and falling incomes. It doesn't paint a pretty picture. If we have a significant reset in asset values, they stand to lose a significant amount of (paper) money - but real if forced to sell by bank (in the rental game).

I thought property investors could just put up rents if they ever got into a sticky situation or costs increased?

Is that not right?
Everyone has always told me rent is completely inelastic.

"Everyone has always told me rent is completely inelastic."

General fallacy. Very specific to circumstances.

Look at rental prices in Queenstown (both residential and commercial)

The decision to not allow the RBNZ to implement DTI is going to result in potential significant collateral damage. The potential implications of that single decision:

1) property prices would not have risen as much
2) government stimulus package would be smaller
3) future government debt to GDP would likely be lower
4) government interest rates might be lower in future
5) money spent by the government on debt servicing, might have been spent on other government programs.
6) or taxes in future may have been lower than they will be in future

The implications will be felt by future generations of New Zealanders ...

Meanwhile the person who made that decision has now left the scene (and is receiving their government pension?), whilst their successors for the next few generations clean up, and many hardworking New Zealanders have been financially ruined, and lost their financial security ...

Leverage is great on the way up, but its terrible on the way down.

Leverage can be financially fatal on the way down. A lesson that many highly leveraged will learn the hard way.

I recall sharing an article about 12 months ago, the dangers of leverage about a highly leveraged property investor who lost the lot in 2009. A property investor commenter told me it was a dated article and was irrelevant. Don't know about their financial position, but most highly leveraged property investors fail to learn the lessons of history, and will only to learn them through firsthand experience.

The answer to the headline can be summed up nicely:

Kicked the can down the road with lots of financial trickery which forces us to have future debt obligations for the illusion of continued normality. Even NZ economists are talking about it: https://www.newshub.co.nz/home/money/2020/03/coronavirus-massive-govt-bo...

This could certainly see a revolt - expecting the next generation to pay the debts of their parents in order to keep a housing bubble pumped up. They're expected to take on massive mortgages, in an environment where leading economists (this one an ex banker) think interest rates are going to rise (that's a bad combination - high debt with an expectation of rising rates). Then on top of that we expect higher taxation to pay for the public bailout of institutions that many have made record profits during times of falling interest rates. The morality/ethics behind this model are highly questionable at best.

What type of lifestyle do the older generations of NZ want for their children? High debt and high taxes...sounds awful...

A recent Bloomberg article described central bank easing with the phrase “pumping money into the economy.” That’s a misconception. Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations. Link

The ideal alternative funding source would also be available on demand by being created ex nihilo domestically, without the need for any capital by the lenders.
Should such a debt instrument or funding source exist, it would be the most attractive source for the sovereign borrowers concerned, and not utilising it would be negligent. To find it, one could ask the debt origination experts at a leading international bond investment bank whether it could be designed. But securities firms could hardly expect to earn money on such an instrument. Fortunately, they will not be needed to design such an instrument: It already exists.

It is one of the oldest and simplest debt ‘products’ in existence: a bank loan contract. In our modern monetary system, which is dominated by digital money transactions, the total amount of digital money is controlled by banks and their bank credit creation (Werner, 2005, Ryan-Collins et al., 2012, Bank of England, 2014a, Bank of England, 2014b). For nominal GDP to grow, more (GDP-based) transactions must take place. This requires a larger amount of money to change hands to pay for this larger amount of transactions. The main way in our debt-based monetary system for more money to be used for transactions is for banks to create more bank credit. In other words, banks need to find borrowers willing and able to borrow from them, so that they can purchase the promissory notes issued by these borrowers. Such promissory notes can be tradable (corporate bonds for instance) or non-tradable (such as standard loan contracts).

Past approaches to debt management have focused on a narrow set of funding tools and debt restructuring, including complex derivative instruments. But the simplest, most plain-vanilla of debt instruments, the bank loan contract, has been unduly neglected, despite superior characteristics.

Enhanced Debt Management suggests that governments of crisis-affected countries should immediately halt the issuance of new government bonds and also the borrowing from the Troika, and instead raise the public sector borrowing requirement by entering into loan contracts from the banks in their country. Since aggregate private debt is much larger than government debt, and banks are the single biggest providers of the former, they are also able to provide for all the funding needs of the government. Banks used to be involved in direct lending to governments, but as the IMF/World Bank manual underlines, this has been actively discouraged for the past twenty years or so. Link - 4. A better option: Enhanced Debt Management

Pretty hard to borrow money with no job or after taking a big pay cut. If this isn't the end of the road then i don't know what is. Are we going to get into a downward spiral and then just wait for another Pandemic to finish it off ?

"Pretty hard to borrow money with no job or after taking a big pay cut."

Exactly.

If household incomes have fallen, this means borrowing capacity has fallen. That means even if they have reduced income levels, the borrowing capacity has fallen, and they will be unable to finance the purchase of the house at current price levels.

Put another way, the pool of potential house buyers at current price levels has shrunk.

If there are many time constrained sellers, then there will be fewer,if any, offers at current price levels. If sellers need to sell, then they may need to lower the price that they accept. That is how house prices fall.

The underlying demand vs underlying supply framework used by many property promoters (underlying housing shortage due to growing population, insufficient number of houses), fails to consider the above dynamics.

You can have a growing population and insufficient houses, but if buyers can't finance purchases at current price levels, then prices are unlikely to rise.

In that situation, due to lack of ability to finance, there are more people living in the house (rising number of occupants per dwelling), rising homelessness, rising number of people relocating to other less expensive areas, or house prices fall.

If anyone has understood the calculation of the underlying supply numbers, then the assumption of a fixed number of people per dwelling regardless of price changes is incorrect, in the context of rising house prices. Changing house prices changes the number of occupants per dwelling in reality.

Maaaaate, the RBNZ prints money, gives it to the government. The government gives it to you so you can pay your mortgage whilst out of work. You give it to the banks. Works every time.

Hmm.... if the banks are highly capitalised, have strong liquidity positions and are in a strong position to meet the economic and financial shock... why the need to be propped up by the RBNZ?

3x the amount of "cash" in the system than normal. Is it cash or debt? $21B to go where?

Is it cash or debt? $21B to go where?

Primarily government deficit spending via transfer payments to various government institutions - Work and Income, DHBs etc

These payments will get capitalised in the form of NZ government debt issued to the minority rentier class in return for their savings and yet the majority will be called upon to service and liquidate this IOU via taxation.

IO, you have friends with mortgages over one million over various properties?
Wow, they are so leveraged????
We have mortgages totalling several million secured by a large number of properties!
We own a helluva lot more than the Banks do and average returns on purchase is around 10% p.a. On purchase!
Prices in ChCh are unlikely to be dropping but time will tell, however I doubt it!
Everyone is not over leveraged and with interest rates at 3% there ain’t going to be much damage as you think around NZ.

Think you replied to the wrong comment TM2 but won't hold that against you...

Good for you and all the best.

"We own a helluva lot more than the Banks do and average returns on purchase is around 10% p.a. On purchase!"

Congratulations to you on your returns. A relative earned rental yields on their purchase price of 24% p.a, before they sold a few years ago.

Returns on purchase price, however is less relevant when reviewing leverage.

A relevant metric on the degree of leverage is
1) interest coverage ratio
2) debt service ratio (for households)
3) LVR

Some property investors have been investing for many decades. They may still be financially vulnerable if they undertook equity release / deposit recycling techniques as property prices rose, and as a result are currently at or near maximum allowable limits.

From a personal point of view , I have exited the Bond market completely , and the profit was pretty good since my first investment in fixed interest paper and gilts in 2008 .

So other than my mortgage free home and a small-mortgaged commercial office suite, a lifestyle asset (in reality its not an asset but a expense ...........a water vessel ) , I am invested 100% in cash with no debt whatsoever , no equities , no Bonds , no gold , no stupid things like Bitcoin ..............just plain old cash

And I will not be spending anything in the economy , other than essentials like food and energy until I am sure we are over this .

So the RBNZ can do whatever it likes , I will not be borrowing any money at all , either personally or in my practice , in essence my buying or spending decisions are frozen for the forseeable future .

"And I will not be spending anything in the economy , other than essentials like food and energy until I am sure we are over this .

So the RBNZ can do whatever it likes , I will not be borrowing any money at all , either personally or in my practice , in essence my buying or spending decisions are frozen for the forseeable future ."

If many people and companies are thinking in this way, is a recovery of the New Zealand economy highly likely to be V shaped?

Remember Boatman is in a strong financial position. Then think of those that are in weak financial positions - overleveraged, unemployed, self employed business owners with little revenue ..

Look at the early signs coming out of China:
https://www.bloomberg.com/news/articles/2020-03-30/as-rest-of-world-lock...

Well last time around, savers lost out. Assets inflated greatly and cash stayed where it was. They may well do the same again. Be careful. I lost out big time during the GFC by selling up and holding cash.

"I lost out big time during the GFC by selling up"

Can you elaborate as to why you sold up during the GFC?

You mean elaborate whether you sold BEFORE or AFTER the crash. My prediction is a crash this time with a double digit number starting with a 2. Time frame this year to early next. None of the Economists are being honest as they dont want to scare the sheeple. This is uncharted waters anything is possible right now.

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