The Reserve Bank says its Funding for Lending Programme (FLP), offering banks up to $28 billion of funding priced at the 0.25% Official Cash Rate (OCR), will launch on Monday, December 7.
The FLP will offer three-year funding, with banks able to borrow up to 6% of their total outstanding loans to businesses and households, made up of an initial allocation of 4% and an additional incentive-based allocation of 2% based on new lending. Access to FLP funding is available over a two-year period from 7 December to 6 December 2022, subject to any extension by the Reserve Bank.
The FLP is designed to provide additional stimulus in response to COVID-19, with the aim of reducing banks’ funding costs (including deposit rates) and lowering borrowers' interest rates. It will create lending capacity for banks, and potentially be used to pay down more expensive wholesale funding.
The FLP comes on top of other stimulatory measures from the Reserve Bank including the Large Scale Asset Purchase Programme (LSAP) through which the Reserve Bank is buying up to $100 billion worth of government and local government bonds with new money, and the reduction of the OCR to its record low of 0.25%.
The need for the FLP has been questioned, especially as the cheap funding can help banks fund home loans even though the housing market is already red hot. However, one suggestion is that the cheap FLP funding ought to lead to lower floating borrowing rates, which haven't fallen in line with fixed-term rates, potentially for home loans and business lending.
The Reserve Bank says the FLP borrowing rate will adjust over the term of transactions, moving with any changes to the OCR. The FLP requires approved eligible collateral to be pledged in a similar manner to the Reserve Bank's Open Market Operation and Term Lending Facility.
"The Reserve Bank will make the FLP available for eligible counterparties to use on a daily basis, for a period of 18 months for banks’ initial allocations and a further six months for banks’ additional incentive-based allocations. Eligible counterparties will be able to access the FLP between 9:00am - 12:00pm every banking day. Settlement will occur on the next business day," the Reserve Bank says.
Below are some comments from a FLP term sheet the Reserve Bank has issued.
The Reserve Bank of New Zealand (the Bank) has responsibility for formulating and implementing monetary policy directed to the economic objectives of achieving and maintaining stability in the general level of prices over the medium term, and supporting maximum sustainable employment.
To this end, the Bank has established a Funding for Lending Programme (the FLP) in accordance with its purposes set out in section 1A of the Reserve Bank of New Zealand Act 1989. The FLP offers secured term central bank funding to registered banks, with the aim of lowering funding costs to stimulate lending growth across the economy and help reduce interest rates for borrowers.
Under the FLP, the Bank will offer 3-year funding to eligible institutions. The funding will be structured as floating rate Repurchase Transactions priced at the Official Cash Rate (OCR), each for a term of three years. Participants may access the funding over a 2-year transaction period. The Bank reserves the right to extend (but not shorten) the transaction period.
The Bank may otherwise make additions, modifications, or amendments to these terms at any time by updating the relevant page on the Bank’s website.