By Gareth Vaughan
The Reserve Bank's Core Funding Ratio (CFR), which strives to reduce banks reliance on "hot" short-term overseas funding, could ultimately go higher than the current 75% target.
The central bank plans to hike the CFR, which currently requires banks to fund 65% of their loans from either retail deposits or long-term wholesale funding with maturities of more than one year, both this year and next year. A Reserve Bank spokeswoman told interest.co.nz the CFR, which was introduced on April 1 last year, would be lifted to 70% on July 1 this year and then 75% on July 1 next year.
However, it could ultimately go even higher, something the International Monetary Fund - which pointed out New Zealand's short-term external debt is 50% of Gross Domestic Product - recommended this week.
The Basel III international banking reforms revealed last year by the Basel Committee on Banking Supervision, set out plans for a Net Stable Funding Ratio (NSFR), which the Reserve Bank describes as a broad equivalent of its CFR though "somewhat stricter" even once the CFR rises to 75%.
A higher core funding ratio forces banks to raise more money from local term depositers and more money through long term bonds offshore, both of which have been more expensive than short term wholesale funds and both of which have helped keep a lid on lending growth in the last 18 months.
The NSFR requires a minimum amount of funding that is expected to be stable over a one year time horizon based on liquidity risk factors assigned to assets and off-balance sheet liquidity exposures. It's intended to promote longer-term structural funding of banks' balance sheets, off-balance sheet exposures and capital markets activities. See more here.
Although the Basel liquidity framework applies to international banking groups and there is no "explicit" requirement to apply it directly to any New Zealand banks, the Reserve Bank spokeswoman said: "We will be doing further work to consider how to reflect the NSFR in our liquidity requirements."
The spokeswoman said the central bank couldn't give an exact percentage on how the NSFR might translate into the CFR, saying it was early days and just how the NSFR might be reflected in Reserve Bank liquidity requirements was still being firmed up. And the NSFR isn't due to come into force until January 1, 2018.
We'll cope, banks say
Interest.co.nz asked the big four banks about the Reserve Bank's plans to lift the CFR to 70% this July and then 75% next July. A spokeswoman for ANZ said her bank was compliant with the current CFR and confident the increase would not pose any issues. An ASB spokeswoman said her bank would continue to "comfortably meet" the CFR criteria. A BNZ spokeswoman said the BNZ was comfortably above the current CFR and "fully expects" to meet the step up in July.
However, a Westpac spokeswoman said the bank had no comment until the Reserve Bank confirms what the CFR will be.
The introduction of the CFR has seen the big banks compete more strongly for retail deposit funding resulting in smaller locally owned rivals such as Kiwibank and TSB Bank forced to seek offshore and wholesale funding. Kiwibank most recently has tapped a European commercial paper programme for hundreds of millions of dollars in short-term funding and TSB recently secured its first wholesale funding ever, raising just under NZ$40 million in 90 day money from institutional investors.
Some of the banks are currently offering term deposit rates for between three and nine months of 3.5% to 4.7% (or up to 5.3% in Bank of Baroda's case), well ahead of the Official Cash Rate of just 2.5%. See all term deposit rates for one to nine months here.
Meanwhile, the other banks are looking to follow BNZ and issue covered bonds to secure cheap, long-term wholesale funding. BNZ is so far the only local bank to have issued covered bonds - both domestically and in Europe - although Westpac delayed a 1 billion euros issue in February.
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13 Comments
Bang on Justice ...Bollard has been jerked off his seat by the IMF comments. But expect the banks to flog covered bonds by the billion and push for an increase in the 10% ceiling. They will strive to orchestrate low deposit rates here. There will be no comcom looking into that game.
Money Man
They have been doing exactly this for over 12 months already !! - why do you think the Banks "influenced" the recent OCR drop ?
Biggest problem we have immediately is credit rating downgerades for the banks and the country and before we know it up go interest rates and whoopee the banks margins will increase and thwey can pay more for intgernal deposits.
Seems to be only one winner all the time ... the banks !!
Why would Banks influence OCR if they have reduced both lending rates and deposit rates by same margin (TD rates and lending rates dropped by same amount like 6 month rates both dropped by 50 basis points).
Sorry your rationale does not fit this scenerio but agree margins on floating rates have been nudging up over recent time.
Just because rates move up there in no logic margins willl increase as well.
A review of margins over last 10 years or so will see a steady period of reducing bank margins (especially when there was a high level of fixed rate lending where margins are lower than floating)
Doesn't their rate of return increase if rates have dropped, but the spread is still the same?
e.g. lending rate 5.5%, deposit rate paid 3.5%, spread 2%, return is 57% over the deposit rate paid.
lending rate 5.0%, deposit rate paid 3.0%, spread 2%, return is now 66% over the deposit rate paid.
What am I missing?
Money man, the more longterm the loan the more risk therefore Banks will justify increased margins. Reserve Bank wants the average length of loans to be 5 years, 2009 average length of loans 12 months.The other thing to be introduced is a cap or buffer which will roll out till 2016 and that will also allow banks to argue that cost of funding will justify higher interest charges.
How times have changed. The mortage wars are a distant memory and now we have deposit wars ... banks paying retail deposit rates ABOVE wholesale rates!
Of course they will more than make up for this on the lending side, which seems to diminish the importance of the OCR.
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