Govt, Reserve Bank more confident about ability to handle global funding crisis; 'Toolkit' can be rolled out 'very quickly'

Govt, Reserve Bank more confident about ability to handle global funding crisis; 'Toolkit' can be rolled out 'very quickly'

By Alex Tarrant

The government and the Reserve Bank are confident New Zealand is better placed to handle a bank funding crunch if global credit markets were to freeze again, with valuable lessons learnt from the response to the squeeze caused by the collapse of Lehman Brothers in 2008.

All eyes are currently on the sovereign debt crisis in Europe, where a debt default by any one of the 'peripheral' countries like Greece or Ireland could send global financial markets into a tailspin as banks and investors cease trusting and lending to each other while the situation is sorted out.

New Zealand policy makers are more upbeat than that, saying the 2008 experience left them with knowledge of what was needed to respond to such a crisis if it were to hit again.

New Treasury boss Gabs Makhlouf has already said he does not expect a Greek default would be another Lehman moment, and a Reserve Bank spokesman told interest.co.nz that the RBNZ is not currently concerned about that eventuality. This also follows comments from BNZ head of research Stephen Toplis that he did not consider the Greek crisis could be a 'Lehman II' causing a new global financial crisis.

But all of the above do accept there would be pressure on the New Zealand system if there were to be a blowup in Europe, meaning a crisis response toolkit is in order, with Finance Minister Bill English last week cheerleading the government's preparedness for helping banks deal with a funding squeeze.

"We know what the toolkit is because we went through this back in 2008. The banks are more familiar with what happens if they can’t roll their debt over, the Reserve Bank knows what facilities it needs to maintain our banks’ [funding lines]," English said.

"We’re just speculating here, but if anything significant happened in Europe, then I think we’re in reasonable shape to be able to deal with it," he said.

In November 2008 the Reserve Bank introduced a series of temporary measures to allow banks to access funding when the global credit crunch hit. The leading tool went by the name of the Term Auction Facility, or TAF for short, with which banks were able to borrow funds for three, six or 12 months using assets such as Residential Mortgage Backed Securities (RMBS), registered bank bills or New Zealand government securities as collateral. See the other measures here.

The toolkit was taken away a year later after credit market conditions had eased enough for banks to safely and more cheaply access funds.

In light of English's comments that the government knew what was needed in the toolkit to deal with a funding squeeze, interest.co.nz asked the Reserve Bank how long it would take to implement those same measures if another crisis were to hit.

"We can bring in required instruments very quickly, especially as banks are now better positioned with appropriate vehicles and systems for the likes of mortgage-backed securities and covered bonds," a Reserve Bank spokesman said.

Banks were now much better positioned than during the global financial crisis, since the Reserve Bank introduced its Core Funding Ratio, the RBNZ spokesman said.

The systemic banks were over or meeting the Core Funding Ratio requirement, reducing their exposure to market gridlock. Furthermore, NZ bank commercial paper appeared to be well sought after as a diversification for investors, he said.

Meanwhile, the Reserve Bank did not see the need for any further new instruments for responding to another credit crunch, and asked whether it would do anything differently than in 2008, the spokesman replied the RBNZ was "not currently concerned about such an eventuality".

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So there isn't a big bogeyman hiding in the bushes and even if there was ...don't worry

cos the grown ups have got a plan to save you from the bogeyman who isn't there.

This is good news .........for us .

It does buy us time until the next fallout from over-indebted countires shake the Global debt markets .

We should be right with all that extra money the government has been borrowing on our behalf, for a few months anyway.

Trouble is it is dorking over our exporters by pushing the dollar up.

whats the mystery?

The essence of the tool kit is that government will print the NZD to enable the banks to pay overseas creditors, where currently the exchange rate of the NZD is in a favourable position.  The banks will therefore be able to monetize their loan assets so that they can 'issue a cheque for a loan' today which might repay 400,000 plus interest in the future and shortly thereafter deposit the mortgage documents with the RBA on a no recourse basis if necessary (depending on how dire the state of the banks and the economy is) so that the banks can get 400,000 NZD loan from the RBA.

The degree and ease at which the banks can exchange their long term paying loans for cash loans will then depend on how dire the banks need for cash for creditors becomes.

Importantly this will be happening at a time when most other central banks will be doing the same thing so banks in europe for example that are owed money from Australasia will *also* be able to get zero percent finance from their central bank in exchange for their own loan assets while still asking Australasia to pay a much higher rate on whatever Australasian banks have borrowed from Europe and the european banks will have no big requirement to demand Australasian banks repay euro loans.

So at the end of the day providing the other central banks carry on fighting deflation by aiming to create inflation, NZ is in a good position to ride out the deflationary storm that continues to threaten to overwhelm the system    

 

 

 

 

 

 

 

Iain

I should be entitled to comment here without being the victim of your abuse.

I dont write the policy nor do i know anybody who does.

 

Thats a bit over the top Andrew In Finland, your opinion is valued and Ian has published a point in this forum of debate.

Firstly though Alex Tarrent "with valuable lessons learnt from the response to the squeeze caused by the collapse of Lehman Brothers in 2008". This statement is quite incorrect for it was the underlying, suspect nature of bank assets that caused the collapse of Lehman.

All banks had these toxic assets  and where trading them as securitized (on property as good as gold), and were trading them. Often AAA rated products turned out to be junk and this lead to Credit Default Swaps (insurance), and other trade markets markets being bankrupted. ref> http://www.time.com/time/business/article/0,8599,1723152,00.html

And from that poor starting point the rest of your story Alex continues as a reflection of inept journalism.

Remember when you say Alex "All eyes are currently on the sovereign debt crisis in Europe, where a debt default by any one of the 'peripheral' countries like Greece or Ireland", you either intentionally or unintentionally fail to point out that the debt of these countries was created by banks.

You leave readers with the impression governments are stupid for borrowing money when infact governments are stupid for socializing bank looses to keep a system that doesn't work floating and in pointing to Greece and Ireland when actually America owes more money $45,000 per person than Greece $44,000 is understandable but still not placing the blame where the trouble started.

When the reserve bank talks about the 'toolkit' lets face it they are talking about placing private losses onto the governments social balance sheet as per South Canterbury Finance $1.7 B investor bailout ref> http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1067...

When they talk about 'Term Auction Facility' what they are saying is they will auction Government owned assets to the highest bidder to secure debt. The highest bidder in the event of a monetary collapse is going to pick up our assets for cents in the dollar as per Greece, Ireland and other enslaved nations.

 

 

I could go on all night but to ask Andrew what are you meaning with 400,000 this and that, I don't understand.

 

Well said Ian, nothing to disagree with there. The present banking system must collapse eventually and I suspect we are a lot closer than most think.

AiF - what an earth are you talking about, he was not remotely abusing you? This forum is typically robust in its debating style, perhaps a more formal Scandinavian web site might be more to your taste?

Andyh - yes, it will collapse. How they try and ressurect it, is the 64,000 dollar question.

The curent 'winners' in the system will try and keep 'winning'.

The losers will protest, as per egypt/spain/greece/ just about everywhere.

Where it will get interesting is the point at which folk can't pay what is asked for services like electricity - and there are no substitute customers waiting in the wings. Those who have defaulted/refused to pay, will stillwant the service.......and will commandeer it.

Four legs goooood, two legs baaaaaaad here we come?

 

AndyH

I have no problem with a robust conversation.    Your comments about the collapse of new zealand that you and your chums were painting about 3 years ago still look failed predictions to me.   During that time you spun everything to paint a picture of total doom.  Meanwhile i pointed out that NZ would reduce interest rates and there would probably be real property falls before there were large nominal falls and the NZ commodities would likely do well in a rising inflationary environment. 

Dispite all of that you called me a fruitcake recently as if you were in total denial of everything you were wrong about.   

This is supposedly a discussion board and i think i am entitled to object to continually being labeled as a friend of banking or an insider of banking or being labeled in the kind of underhand manner that you and others seem to enjoy doing where anybody who does not agree with you is treated like they are the enemy or they are mentally retarded.

Your enemy was reality not me.

On the subject of your predictions I would guess that Nelson properties would be fairly desirable to Christchurch retirees wanting to move elsewhere?  Property crashing in Nelson yet?  How about NZD crash? 

 

 

 

 

 

Parky ......are you still in debt to a bank.....jeeez Parky....how friggin much did you borrow?

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