Kiwibank CEO Sam Knowles has queried the Reserve Bank's decision to move ahead of the rest of the world to introduce prudential liquidity rules that are forcing the big 4 Australian owned banks to raise more funds from retail depositers here, pushing up the cost of funds for Kiwibank. Until late last year Kiwibank was able to raise all its funds from local depositers, but intense competition from other banks for retail deposits and Kiwibank's own strong lending growth rate forced it to raise NZ$309 million in longer term funds from the Australian bond markets last year. "The new Reserve Bank rules are forcing us to go offshore," Knowles told a news conference after releasing first half results showing an 8% fall in profits despite a 27.4% growth in assets. Kiwibank's ratio of net interest income as a percentage of average total assets fell to 1.4% from 1.8% the previous year as it was forced to pay higher rates for local deposits and pay higher rates for foreign longer term debt.
"New Zealand is much better being a fast follower, rather than a leader," Knowles said of the Reserve Bank's liquidity policy. The Reserve Bank has specified that banks must have 65% of their funding from stable sources by later this year, which is driving the big four Australian banks to raise more funds from retail depositers locally and for longer terms overseas. This focus on the 'core funding ratio' is designed to discourage the big banks from relying too much on 'hot foreign' money, a factor that fueled relatively low interest rates from 2003 to 2007 as banks here raised funds for fixed mortgages by borrowing on international short term money markets. The Reserve Bank was the first central bank to implement such a policy, which is being considered by other central banks and prudential regulators in Europe and Australia. "This has increased the total costs in New Zealand of borrowing money when it didn't need to be," Knowles said. "If you're a fast follower you've got a lot more confidence that your leadership is well defined," Knowles said when asked if the Reserve Bank would have gone down this path anyway.