State owned Kiwibank borrows NZ$927.3 million from European short-term 'hot money' market

Isn't this exactly the sort of thing the IMF has told us not to do?

Our state owned bank is borrowing heavily and cheaply in the hot European money markets (the ones that could blow up at any moment) and then funneling back into the New Zealand housing market.

Kiwibank was the second biggest mortgage lender in the March quarter, only just behind BNZ.

It is offering cheap mortgage rates and has decided not to compete as hard with the Aussie banks for term deposit funding. That's because it can borrow the money much cheaper offshore.

Kiwibank might argue this is an unintended  consequence of the Reserve Bank's Core Funding Ratio policy, which forces the Aussie banks to raise more local and longer term funding.

Until now Kiwibank has been able to get hold of local term deposit funds more cheaply. Now it has to compete a lot harder.

Essentially what is happening here is Kiwibank is importing Europe's loose monetary policy so it can keep growing lending as fast as possible.

How does this help New Zealand? It increases our foreign debt. It further pumps credit into an already pumped up housing market. It makes us more vulnerable to a meltdown on European financial markets.

It subverts the Reserve Bank's monetary policy. It encourages borrowing and discourages saving, by keeping term deposit rates lower than they otherwise would be.

This helps push up the New Zealand dollar and restrain our export sector.

The actions of the state-owned bank fly directly in the face of the government's avowed policy of trying to encourage savings and exporting, while discourage borrowing and spending in the housing market.

Why is Kiwibank doing this and putting taxpayer capital at risk in the process?

cheers

Bernard

With Mr smarty pants" rich prick" Cullen in charge, anything could happen! I wouldnt trust Cullen to be in charge of of the PTA cake raffle money.

I have been predicting for 3 years now, that Kiwibank will cost the taxpayer billions by being the last and biggest sucker in the mortgage and housing bubble game. Kind of like Fannie and Freddie in the USA. It would not surprise me at all if Kiwibank are being pushed politically, to try and keep the bubble inflated a bit longer.

Les Rudd asks a good question. I have also been saying for years, that the only honourable thing a bank can do under conditions of supply-induced property price bubbles, is QUIT THE INDUSTRY ALTOGETHER. Anything else would be "failure to compete".

How about Kiwibank not lending more money than it has in deposits? For example if Kiwibank has $1,000 in deposits it can only lend $500. At most.

Deanbo good in theory, though its not the amount on deposit but the speed of the money in circulation that stil causes problems.

Bank 1 has $1m on deposit, and ignoring prudential reserves, bank lends me $1m, I then buy a house with the funds, and the vendor who has no mortgage places the money back with Bank 1, so they now have $2m on deposit, $1m on loans, and $1m to lend. even if the money went to another bank, there is now $1m more than before available to be lent.

If this happens every day lending grows by $1m per day per loan per bank.

Add in many transactions, and throw in some overseas borrowings and the more transactions the more assets and liabilites are created. i.e. current situation.

A little simplistic but shows how limiting lending to deposits still has a multiplier effect, though reduced from the above example if you limit the amount that can be lent, i.e. your 50%. You will still be able to lend 500+ $250+ $125+ $67.5+33.75 and so on. Original $1000 now becomes $999 lent after 10 new loans transactions.  Obviously if you pay off debt then you stop it, which is not good if you have an infrastructure based on lending.

As you can see its the speed of lending that is altered, at limiting lending to 50% of deposits then takes 10 transactions to lend $1m as opposed to 0% limit  takes 1 transaction to lend $1m.

Bernard

How is it that Kiwibank can have current assets of $1b and current liabiities of $11b ie working capital of -($10b) and say that it is effectively managing liquidity risk? 

In Kiwibanks disclosure statement it makes numerous references to liquidity ratios - all refer to zero % (guess that is a typo?) and making use of the securitization program offered by the Reserve Bank.

On the face of it they appear to be using the government as a bank overdraft.

What happens should the Government withdraw this program?

I regularly assess businesses credit risk for loan applications, and frankly I would bin this one! 

I would seriously question Kiwibanks governence. They appear to be playing roulette. I'm gobsmacked. 

The finance sector is generally still mismatched in terms of liquidity, but nothing like this. They are really relying on the fact that depositors (retail) have nowhere to run, and placing huge reliance on the Government remaining solvent.

Great business model!

And I am frightened because I have a few deposits with Kiwibank. If they issue covered bonds or the Government privatises KiwiBank then I am out.  But where in the hell would I put them -.  under the mattress?  The big four are starting to look a little shaky and as far as I can ascertain the Government has only guaranteed their overseas borrowing not our deposits..  

What is really sad is the confirmation bias in our policy makers – whatever happens, whatever any other jurisdiction does, whatever changes in the world, whatever we lose in productive capacity our well regarded policy framework remains immutable.

The only way to change them is to change them.  I wonder how long it is going to take and how much pain we will witness or ignore until it does.

www.johnwalley.co.nz

Key etc are standing by watching this happen probably hoping KB will get themselves in trouble, then they can say "see told you so, banks shouldn't be state run".

But really if they were responsible owners of Kiwibank they would not be allowing it to happen.

So it's not really whether the government owns a bank or not, it's whether the government that owns the bank is responsible or not, these guys are starting to prove over and over again, they are not.

Nz has huge foreign debt levels. Most of this debt is balanced by property values. Property values are based on the last very small % of the housing stock that is turned over. I.e our housing stock valuation is hanging by a thread. And if prices fall, all of a sudden our debt becomes a real issue as it's no longer balanced against falling property prices.

Kiwibank are doing everything they can to prevent this breakdown in prices from occurring by trying to stick people with no money into big loans. If it works we avoid a huge fallout, if it doesn't then they're just going to make the fallout that much worse.

Would it be possible for Kiwibank to borrow such an amount from/in the New Zealand domestic market yes or no? Would it be possible (even at a higher cost)? Why should we allow cheap money to inflate domestic prices? At some point will become slaves to foreign countries? How would you feel about Kiwibank borrowing the same amount from the Reserve Bank? Would that be a better outcome? 

I suppose KiwiBank issues the commerical paper denominated in New Zealand dollars....

In that case, it is not really "foreign" borrowing as such. Sure, European funds etc may buy the paper, but before that they are trading their Euros for New Zealand dollars. Essentially it is 'non residents' buying the debt, and a bunch of New Zealanders holding more Euros. This sort of transaction pushes up the value of the NZD, but apart from that it's not dreaded "foreign debt".

Kiwibank (with Government support) is actually in a great position right now provided Treasury is prepared to prop them up. If the growth that they are experiencing is at the expense of the "Big 4", ie stealing their better customers, then the "Big 4" will find asset quality begins to deteriorate rather quickly. Impaired assets will rise comparatively quickly as will past dues. Income will begin to diminish as will dividend flows across the Tasman. It will  create a more even playing field. I for one never understood how or why the OIO and Monopolies Commission allowed ALL NZs banks to be Australian owned. Talk about losing control and placing your destiny in the hands of someone else. Just silly.

Kiwibank (with Government support) is actually in a great position right now provided Treasury is prepared to prop them up. If the growth that they are experiencing is at the expense of the "Big 4", ie stealing their better customers, then the "Big 4" will find asset quality begins to deteriorate rather quickly. Impaired assets will rise comparatively quickly as will past dues. Income will begin to diminish as will dividend flows across the Tasman. It will  create a more even playing field. I for one never understood how or why the OIO and Monopolies Commission allowed ALL NZs banks to be Australian owned. Talk about losing control and placing your destiny in the hands of someone else. Just silly.

Kiwibank is just reacting to the realities of the market its operating in. The RBNZ's increases in the Core Funding Ratio requirements triggered a major term deposit war amongst the local banks forcing deposit rates, and consequently borrowing rates, higher than they would have been otherwise. But the local deposit market is not big enough to finance the banks (we plain don't save enough surprise surprise).

So the banks, now including Kiwibank, continue to access the larger funding pools offshore. Its not necessarily "cheap" money because they take no FX risk and swap the funds back into NZ Dollars and hence pay NZ rates, but the fact that they're getting that portion from offshore markets takes the heat of the local deposit market and keeps borrowing & depsit rates lower than they would have been otherwise. And that "swapped" offshore funding cost then partly sets the rates for the  NZ market as they don't care which market they get it from (providing they stay with the required CFR)

Lets not get hysterical about Kiwibank we all know the Govt would bail them out, as would the Aust Govt with the Oz banks - therefore go figure which is the safer ?  That said about Kiwibank, I still struggle with the Govt using my tax dollars to provide social welfarism, and I really struggle with the concept of a Govt subsidising (permitting sub-par returns) one of its own entities to compete against the private sector - such practices in the long run hurt a market, as support for, and service quality, deteriorate over time.

By the way Kane, why did the Govt permit Australia banks into the NZ market ? because a strong banking system is key to faciliating credit and growth. Small countries with an inefficient small banking system are hugely vunerable in a time of crisis - go look at the banks in Ireland, Iceland, Greece etc - one of the reason we're not in their situation, by a million miles, is because we didn't have a banking crisis i.e. we didn't have 6 Kiwibanks. Big doesn't guarantee it, but small substantially increases that risk

On a different note. Whats everyones opinion on kiwibanks off set mortgages and will other banks follow. I'm very tempted by it