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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