By Gareth Vaughan
Standard & Poor's (S&P) says it doesn't expect the Reserve Bank's blueprint for dealing with bank failures, its pre-positioning for open bank resolution (OBR) , to cost New Zealand's major banks too much and it's therefore unlikely to threaten their credit ratings.
S&P's fellow international credit rating agency, Moody's Investors Service, has its credit ratings on the big four banks - ANZ NZ, ASB, BNZ and Westpac NZ - on review for possible downgrade and says the review will consider, among other things, the Reserve Bank's OBR proposals. Moody's has said information technology (IT) costs associated with pre-positioning banks internal systems for OBR could add negative pressure to the Aa2 long-term bank deposit ratings it currently has on ANZ, ASB, BNZ, and Westpac.
And auditing group KPMG said in its recently released annual Financial Institutions Performance Survey that a "healthy tension" had developed between the banks and the Reserve Bank over a growing list of new regulation and resulting compliance costs including OBR. KPMG said the banks estimated that about one third of their IT spend goes on compliance and they felt this was "impeding industry efforts to innovate and create new products for customers."
However Peter Sikora, S&P's analytical manager for financial institutions in the Pacific, told interest.co.nz that although the credit rating agency's staff hadn't yet had the opportunity to consider the OBR proposals in detail, "at this stage our expectations would be that it won't be a significant imposition on our view of the financial strength of institutions."
"That said the devil's in the detail," Sikora added. "Key to the outcome will be the final requirements that the regulators require to take control of each of these entities if it (OBR) had to be untriggered."
S&P currently has AA long-term ratings on all the big four banks with a stable outlook.
Living wills for banks
OBR is effectively the Reserve Bank's blueprint for dealing with bank failures. In a consultation paper it released earlier this year, the central bank suggested all locally incorporated banks with retail funding of more than NZ$1 billion would be required to pre-position for OBR. The Reserve Bank says its outsourcing, local incorporation and governance policies were all designed to facilitate the implementation of OBR. Now, the pre-positioning of banks' internal systems represents the next stage in the process.
OBR plans are often called 'living wills' overseas. An open bank resolution is an option whereby the bank is open for business on the next business day after its temporary closure following an insolvency event or an event that triggered statutory management, and is able to provide customers with full or partial access to their accounts and other bank services.
The key feature of OBR is that creditors are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can then quickly reopen with the unfrozen or accessible portion of funds guaranteed by government to avert a further run by creditors. Additional funds can be unfrozen at later dates as the final losses are determined.
The Reserve Bank says the OBR policy is intended to act as a resolution tool that heaps the cost of bank failure primarily onto a bank's shareholders and creditors rather than taxpayers, thus minimising moral hazard and providing a continuity of core banking services. The policy, previously known as Bank Creditor Recapitalisation, was developed after a review of the central bank's crisis management policies and instruments following the 1997 Asian financial crisis. See more detail on the proposals here.
The Reserve Bank has set a June 30 deadline for responses to its OBR consultation paper. It then expects detailed implementation plans from the banks by September 30 and for them to be fully pre-positioned by late 2012.
Key risks to Chinese banks are their exposure to property developers & local govt financing vehicles
Ryan Tsang, S&P's Hong Kong-based managing director of Asia-Pacific financial institutions ratings, was also in Auckland this week. Tsang, who analyzes China's banks, told interest.co.nz there were a couple of key areas of risk.
China's banks mostly have "pretty good" balance sheets and reasonable capitalisation, Tsang said. And an interest rate regime where the central bank sets the floor for lending rates and the ceiling for deposit rates tended to give them good margins.
"However, having said that it's not to say the Chinese banks have no risks. At the end of the day they are still operating in a very fast growing economy which could be quite volatile. We do see some risk," said Tsang.
"Strong loan growth in recent years could turn into some problems for the Chinese banks. Where we see potential problems are lending to local government financing vehicles and the property sector," Tsang said. "Those are the two main areas of concern."
"These are the two largest exposures. At the end of 2010 the entire Chinese banking sector loan book was about 50 trillion renminbi. About 18% (was loaned) to local government financing vehicles and about the same amount, 18%, to the property sector."
"The property exposure includes a fair bit of residential mortgages and that in our view is quite safe," Tsang added. "The risks are the exposures to property developers. They are the ones to watch out for."
That said, Tsang said S&P anticipated challenges ahead for China's banks but didn't expect a systemic melt down.
Meanwhile, Sikora said the results from S&P's review of the methodology it uses to rate banks was likely to be completed in the fourth quarter of 2011. See more on the review and what it might mean for NZ banks here.
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