By Bernard Hickey
Finance Minister Bill English has quietly warned New Zealand's banks not to put up their mortgage rates by more than any increase in the Reserve Bank's Official Cash Rate, saying their profits are already strong and don't need further strengthening.
"Their interest margins are looking pretty healthy right now. I think there's a bit of slack there," English told Interest.co.nz in a Double Shot Interview (above) when asked what he would say to the banks if they increased mortgage rates by more than any OCR change, or increased them without an OCR hike.
BNZ CEO Andrew Thorburn raised the prospect last month of a decoupling of floating mortgage rates and the OCR in New Zealand because of higher funding costs. See Gareth Vaughan's October 28 article here.
All four big banks have reported strong profits and higher net interest margins this year, despite regular talk of higher funding costs because of financial turmoil in Europe. See Gareth Vaughan's opinion piece here.
Elsewhere, English backed the Reserve Bank's plan for Open Bank Resolution, which is aimed at reducing the government's exposure to any bailouts of banks in the event of global financial crisis.
"The Open Bank Resolution policy is designed to maintain a bank, but ensure that it's the owners and bondholders who take the haircut rather than the taxpayer," English said, adding that there remained discussion on whether term depositors would also take 'haircuts' or losses in the event of a bank collapse.
"The general principle here is quite important. We're much better to have a banking system that's strong to start with, but then knows it faces the consequences of the risks that it takes," English said.
"By the middle of next year we'll be unique in the developed world in having no formal guarantees in place, and by then we'll have the Open Bank Resolution policy in place, which reduces the prospect that taxpayers will be underwriting risks taken by bankers and that's a pretty unpopular policy around the world."
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