IMF says RBNZ should increase core funding ratio higher than planned to buffer for funding shock

IMF says RBNZ should increase core funding ratio higher than planned to buffer for funding shock

By Alex Tarrant

The International Monetary Fund is recommending the Reserve Bank of New Zealand increase its core funding ratio for banks by more than it's currently planning, and for the central bank to publish stress tests done for the major banks last year.

IMF Mission Chief for Australia and New Zealand Ray Brooks, on the IMF’s annual visit to the country, said New Zealand’s reliance on short-term offshore funding meant the country was still exposed to funding shocks, meaning the Reserve Bank should look at its policy for the make-up of bank funding.

The RBNZ’s core funding ratio stipulates banks must currently have 65% of their funding from retail deposits and wholesale funding sources with durations of at least one year, and will be increased to 75% by mid-2012.

The ratio was implemented to reduce New Zealand banks' reliance on short-term funding, and came after the failure of Lehman Brothers in the United States in September 2008, and the subsequent global funding squeeze, cut off much of New Zealand banks’ offshore funding lines.

Brooks said the core funding ratio, introduced on April 1 last year, had been very helpful in decreasing banks’ vulnerability to short-term ‘hot’ offshore wholesale funding.

“But the short-term external debt of the country as of September last year – the latest data – still remains high at 50% of GDP, and so there’s still exposed funding risks,” he said.

“We would advise that the core funding ratio be increased more than planned over time to further to further reduce that risk. The Reserve Bank of New Zealand has some plans to increase it, we think it needs to be raised further.

“And under the Basel III [regulations] there’s a new definition called the ‘net stable funding ratio’, that I think would imply [a] somewhat higher core funding ratio than planned by the Reserve Bank of New Zealand,” Brooks said.

Stress tests should be released

In light of New Zealand’s exposure to short-term funding, Brooks said the Reserve Bank should carry out further ‘stress tests’ on the banks with a scenario where funding lines were disrupted, on top of prolonged high unemployment and falls in property values.

Last year, the RBNZ and Australian Prudential Regulatory Authority carried out bank stress tests with the IMF with a scenario of unemployment rising to 11%, house prices falling 25%, and commercial property values falling 40%.

“So they were fairly significant stress tests,” Brooks said.

“The results for the Australasian banks together show that there was some resilience of the banks to those quite sizeable, but plausible stress tests,” he said.

However, the test results for New Zealand banks on their own had not yet been published. The tests for New Zealand's banks showed roughly the same results as for their Australian parents, he said.

“We would encourage the authorities to publish the test results for the New Zealand banks as a whole,” Brooks said.

“We’d also encourage them to look at what would happen if there was a rise in unemployment over a substantially longer period than in the recent stress tests, together with a rise in long term interest rates from both an increase global interest rates and an increase in the country risk premium,” he said.

The Reserve Bank should look at a scenario encompassing a disruption to bank funding.

“These are some of the stress tests that we know the Australian regulatory authority’s working with the banks to look into as well. As are many of the European banks, looking at what [are] sizeable but plausible shocks,” Brooks said.

“You could invent such a shock that would completely wipe out any banking system anywhere in the world if it was large enough,” he said.

“What we would encourage the authorities to do here is to think about the merits of raising bank capital gradually over time to levels that are significantly above the new Basel III requirements, as a buffer against these shocks.”

This was particularly important as there was a perception the large banks in New Zealand were too big to fail, and posed a significant contingent fiscal liability.

“In sum, the stress tests have shown they [the major New Zealand banks] are resilient to some sizeable shocks, but we would encourage further stress testing and [consideration of] raising the level of bank capital,” Brooks said.

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 "We would encourage the authorities to publish the test results for the New Zealand banks as a whole"...nah...we don't need that being made public do we Bolly...especially at a time when confidence in the property ponzi scheme is so negative...and anyway...we're different...

Cheeky bugger suggesting the RBNZ should pull its finger out on the core funny rate implementation....don't they know the economy depends on cheap credit and endless borrowing...if Bolly and the fools in the Beehive followed the IMF advice..rates would rise......property values would drop like a stone...people might end up not having to borrow heaps from a bank to afford to buy a pine box to live in..and what would that do for the security of the banks!

I like this bit

"You could invent such a shock that would completely wipe out any banking system anywhere in the world if it was large enough,” he said."

Seems the shock has already been invented and we are just waiting for it to happen. I just hope I am fast enough to get mine out when it happens.

Here is the most succinct explanation I have come across with regard to Bernanke's printing presses.

http://www.richardduncaneconomics.com/2011/03/21/bernanke%E2%80%99s-choice/

 

Alex , this poses a conundrum . How will the RBNZ force the Banks to do this ( increase the core ratio) without the banks offering higher deposit rates to savers , and charging higher rates to homeowners ?.

Deposit rates are so low here now it actually makes sense to borrow here against investment property ( and still get the tax writeoff) and buy interest bearing assets in Australia, where the yield is higher . 

Dr Bollard has unwittingly created our very own "outbound  carry trade" 

Yeap, could do this and carry the exchange rate risk which could wipe out any gains made on higher earning assets in Australia.

 "March 22 (Bloomberg) -- New Zealand’s economy will grow 1 percent this year before earthquake rebuilding boosts the expansion to 4 percent in 2012, the International Monetary Fund said.....they were told this by Bill

The damage from the September and February temblors is estimated at NZ$15 billion ($11 billion), or 7.5 percent of gross domestic product, the Washington-based IMF said as part of an annual review of the country’s economy. The Rugby World Cup later this year and higher trade will help propel growth, it said.....Bill told them that one as well

The Reserve Bank of New Zealand’s half percentage-point cut in the official cash rate to 2.5 percent this month was appropriate, the fund said. The rate could be lifted “relatively quickly” should inflation pressures mount because a shift in recent years to floating-rate mortgages makes consumers more sensitive to higher interest rates, it said....and this!

“Monetary policy will need to be tightened when it becomes clear that the recovery is under way,” the IMF said in the statement posted on its website. “The RBNZ needs to guard against medium-term inflation expectations becoming anchored at too high a level".....

In the mean time it's ok to BS the public that inflation is low and will remain low...while debasing the Kiwi$ as fast as possible...stealing from those who saved, to bail out those who splurged themselves into deeper debt.

Good call, buying houses funding by overseas debt is never going to work for anyone in the long term.

Maybe each bloated mortgage could be 'owned' by a foreigner...and when the Kiwi resident fell off a financial cliff, the foreigner would have to come here to secure 'ownership' of said property...with automatic citizenship...and benefit rights...as long as they stayed...and 'invested' ....in yet more property!.......hey presto, no need for a bank.....Bolly could organise flogging the mortgages....

But that  lending can't be funded by offshore borrowing solely as Banks now have a thing called Core Funding Ratio which requires that they are funded by Retail and Long Term Wholesale funding.

And the IMF wants it to be even tighter which will mean limits on amount Banks can Lend, which will stop the ballooning in Lending which winds up Wolly so much.

Even at these historic low rates there is no queues of people outside Banks looking to borrow more, most people are looking at these lower rates as a opportunity to retire debt.

Bank loan approval rates are well down but Banks aren't out there handing it out to every Tom Dick and Harry to make up for it.

Even mortgage brokers are struggling to peddle their wares so its a signal that maybe the leasons of the past have now sunk in.

 

"..Domestically ( the IMF said), the negative impact on confidence and growth might be larger than expected, and a sharp fall in prices of over-valued houses would hit household balance sheets, likely depressing domestic demand. Similar falls in Australian house prices, which also appear overvalued, could spill over to New Zealand."

But,hey. What do they know......

On an indivdual basis if you are repaying debt its not compounding (accured interest within the payment cycle is being met as well as principal reduction) and any additional principal redcutions can have a significant impact on overall term and thus overall cost of credit.

If you are talking on a macro basis then you are right that at this point with Govt increasing its borrowings the debt servicing costs will increase and could be argued its borrowing to cover its own interest bill.

I have no control on whatt the Govt does but I do on my own personal affairs so use my time and energy on those things within my control, not outside it.

 

Its pretty bloody logical that if you are either saving or retiring debt then you are not spending money hence the pain being felt in the retail sector (you need to spend on the neccessiaties of life but everything else needs to be prioritised or eliminated).

On an individual basis if they can retire debt to a level which is mangeable on whatever income they have then they are able to have some protection from all the broadsides that will come their way.

I'll put money on it your a financial sector co-operative.   We can almost smell em when they turn up here now. 

And what to they smell of in your opinion?

And so what if I am.

Its amazing how people get when a view which is not the same as theirs is expressed thay have to get all personal.

Does that mean I am not allowed an opinion whether it is in line with what sector I am be associated with?  What with this co-operative?

 

 Iain has a valid point, ....the banking system is a gobshite whichever way you look at it....so why not put the pollies in charge of the money and do away with the banks.....have a public credit system....where credit is controlled by the pollies who are 'upstanding citizens' who can be trusted to put the wealth and betterment of the country ahead of personal gain......

I cannot think of one single reason why that would not work.!

There has never been a more opportune moment for the increased issuance of public money. It does not increase debt, it does not accrue interest. If well managed within a framework of sound money this is, without doubt, the best option for New Zealand right now. 

We could all just pay down our debt but this is what would happen:

- The money supply would shrink.

- Without a massive boost in the velocity of circulation of money businesses would start going bust, thus starting a vicious downward cycle.

- A Great depression would ensue.

- There isn't actually enough money in the system to repay all the debt (the interest portion doesn't actually exist within the money supply).

The government can continue to ignore this problem and pray for some kind of "recovery" but they cannot ignore the mathematics of this problem.

At some point they must let their pride stand aside and properly discuss this option.

 

 

I so agree!

The fact that the general public tend to ridicule such a sound money approach speaks alot to the degree to which the polity has adopted the status quo neoliberal/globalisation ideology.

New Zealand and Austrailia are in a better position than most sovereign nations to adopt such a measured approach to the future.