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RBNZ reports banks have tightened credit to businesses; gently warns banks to ease back soon (Update 1)

RBNZ reports banks have tightened credit to businesses; gently warns banks to ease back soon (Update 1)



The Reserve Bank has warned households to maintain their currently cautious approach to taking on more debt as the economic recovery gains momentum, saying New Zealand remains vulnerable to further turbulence on global credit markets because of its relatively indebted position. (Updated to include new video report.) But the Reserve Bank has expressed concern about a tightening of credit standards by banks for business borrowers and sees further consolidation in the finance company sector making it difficult to fund property development and other business lending that banks have traditionally shied away from. Reserve Bank Governor Alan Bollard made the comments when releasing the Reserve Bank’s six monthly Financial Stability Report. “As an external debtor country, New Zealand could be vulnerable to any renewed deterioration in global debt markets,” Bollard said. “At the same time, the process of fiscal consolidation could dampen the global recovery, although our major trading partners in Asia and Australia should be less directly affected,” he said. Deputy Governor Grant Spencer said New Zealand’s banks were in good shape and non-performing loans appeared to be plateauing out. “Bank credit growth was restrained through the recession, reflecting weaker demand for credit by households and business and tighter lending standards,” he said. “We believe the banks have the capacity to meet an increase in demand for credit and doing so will be important to sustain the recovery,” he said. The Reserve Bank said it did not expect the major banks to join the Government’s extended deposit guarantee scheme, which is due to lengthen the current scheme expiring in early October out to the end of 2011. It said it expected further rationalization in the finance company sector as the existing plans for a more stringent regulatory regime were phased in. The Reserve Bank said it expected conditions for property development lending to remain difficult in the absence of finance companies. My view The key point in the Financial Stability Report is the Reserve Bank’s friendly nudge to our biggest banks to be ready to start lending again to businesses. The Reserve Bank’s report identifies there has actually been a further tightening of credit standards by the banks since the end of December, despite an apparent turnaround in the economy. Here’s the key section on page 24 of the report below:

“As the domestic recovery progresses, demand for investment finance is likely to increase across the business sector and it is important that credit worthy businesses can access finance on reasonable terms. The New Zealand banking system should be well placed to support the recovery, particularly in light of the improvement in funding in offshore funding markets. While banks are likely to continue to a take a more cautious approach to lending practices, it is expected that they will be prepared to reverse some of the recent tightening in lending standards. The Reserve Bank will continue to monitor banks lending standards and general credit conditions through the recovery.”

The Reserve Bank included a chart showing that credit had tightened in the last year for all sectors, with construction and retail trade sectors reporting the biggest worsening from their long term averages. The Reserve Bank did not specify what it would do if the banks did not ease up. The banks are privately telling many business customers that the Reserve Bank’s new Core Funding Ratio, which forces the banks to raise more funding from expensive local retail markets rather than cheaper ‘hot’ wholesale markets, is a factor in the tightening. The truth is muddier. The banks and their shareholders are also keen to wean themselves off these hot money markets. The ‘hot’ markets aren’t nearly as easy or cheap as they used to be. But it’s clear that the head offices of the big banks in Sydney and Melbourne are clamping down on lending growth to New Zealand businesses. This follows several years of lower profits from their New Zealand divisions and a drive, in some cases, to use precious capital in other parts of their banking operations. ANZ’s push into Asia is certainly a factor in its reluctance to increase lending here. The Reserve Bank could change the capital adequacy rules for businesses to encourage more lending there, but for now the banks seem keener to keep lending against housing than for businesses. Your view. I welcome your thoughts insights below. Here is the full RBNZ statement below.

Financial system outlook improved but fragile The outlook for the financial system has improved over recent months, reflecting a recovery in the New Zealand economy driven by stronger trading partner activity and a sharp lift in the terms of trade, Reserve Bank Governor Alan Bollard said today when releasing the Bank's May 2010 Financial Stability Report. "However, the global financial markets remain fragile," Dr Bollard said. "The sovereign debt concerns facing some European economies have weighed heavily on financial markets in recent weeks. European authorities and the IMF have recently announced initiatives to support sovereign debt markets and to begin dealing with the underlying problems. But there is clearly a risk of further turbulence if adequate progress is not made. "As an external debtor country, New Zealand could be vulnerable to any renewed deterioration in global debt markets. At the same time, the process of fiscal consolidation could dampen the global recovery, although our major trading partners in Asia and Australia should be less directly affected." Dr Bollard noted that global imbalances have reduced over the past two years with higher savings helping to shrink current account deficits. New Zealand has also seen a marked narrowing of its current account deficit. "New Zealand households have increased their savings, which is positive for financial stability. It will be important that households maintain a cautious approach to debt accumulation as the recovery continues." Commenting on the financial system, Deputy Governor Grant Spencer said that the New Zealand banks remain in good shape and will benefit from the economic recovery. Non-performing loans appear to be plateauing out and, notwithstanding the recent market hiccups, banks have successfully been issuing term debt over the past year, lengthening their maturity structure and reducing liquidity risk. "Bank credit growth was restrained through the recession, reflecting weaker demand for credit by households and businesses and tighter lending standards," Mr Spencer said. "We believe the banks have the capacity to meet an increase in demand for credit and doing so will be important to sustain the economic recovery." Mr Spencer noted that a gradual rationalisation of the finance company sector is continuing, with the new more stringent regulatory regime promoting further consolidation. "A number of finance companies have joined the extended Retail Deposit Guarantee Scheme to give them more time to realign their balance sheets. We do not expect the banks to enter the extended guarantee scheme given there is no need for them to do so," Mr Spencer said. "Significant changes to financial sector regulation are occurring around the globe. New Zealand will adopt measures that improve the soundness of the financial system while not undermining its efficiency. A new Prudential Liquidity Policy for banks became effective in April and we expect to make further changes to the bank regulatory regime. "The new non-bank regulatory regime should be largely in place by the end of the year. And the Insurance Bill, giving the Reserve Bank oversight of the insurance industry, is currently progressing through Parliament."

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