NZ banks likely to have to rely on domestic deposits in near term for stable funding, given EU mess, RBNZ says; Mortgage, business rates may rise

NZ banks likely to have to rely on domestic deposits in near term for stable funding, given EU mess, RBNZ says; Mortgage, business rates may rise

There may be upward pressure on term deposit rates over the near term as New Zealand banks struggle to raise cash from offshore wholesale funding sources due to the European sovereign debt crisis.

Business and mortgage lending rates may also rise if those wholesale markets remain problematic well into 2012, the Reserve Bank of New Zealand said in its December quarter Monetary Policy Statement.

Meanwhile, New Zealand banks raising cash through covered bond issues are facing the risk of being crowded out in the market by their Australian parents, which have just been allowed to issue covered bonds by the Australian government.

Marginal bank funding costs had been relatively steady over the past 18 months but were near the top end of recent experience, driven by higher long-term wholesale funding costs, the RBNZ said.

Recent deals made in international funding markets by banks had been particularly costly, suggesting there was significant upward pressure on costs at present.

“New Zealand banks have done very little unsecured long-term funding this year, but there has been some success in issuing covered bonds. Since June, three of the major trading banks have successfully issued covered bonds, although pricing has been on an upward trend,” the Reserve Bank said in the MPS.

“In mid-November, two Australian banks issued covered bonds for the first time, following changes to Australian legislation that allowed banks to access this source of funding. Since then, market conditions have deteriorated and the pricing of any subsequent issues is likely to be considerably higher,” the RBNZ said.

Plans for New Zealand banks to issue covered bonds had been pushed out, given pricing conditions and the risk of being crowded out by their parent banks.

“With raising unsecured term funding still problematic, it seems New Zealand banks will have to rely on domestic retail deposits over the near term for more stable sources of funding,” the Reserve Bank said.

“Should wholesale term funding markets remain problematic well into next year, there is the risk of local banks tightening lending conditions or upward pressure on interest rates faced by domestic firms and households,” it said.

“Overall pricing pressures on bank funding are likely to remain high over the foreseeable future. The recent downgrade of New Zealand Government’s sovereign long-term credit rating has had little impact on bank funding conditions. However, a further downgrade to the sovereign rating could elicit a more substantial market reaction.”

The Reserve Bank said monetary policy would need to take account of bank funding pressures.

NZ$160b in retail deposits

Despite term funding pressures likely to get stronger through 2012, the Reserve Bank noted strong deposit growth and weak credit demand had significantly reduced the pressures on banks to raise term funding.

“In aggregate, banks are currently comfortably above minimum regulatory funding requirements and, if current trends in deposits and credit continue, only a modest level of wholesale term funding will need to be raised over the coming year,” the Reserve Bank said.

Credit growth had peaked in 2007 before falling markedly leading up to the financial crisis. Since mid-2009 grown had been very tepid, with the stock of loans and advances at NZ$320 billion having barely risen over the last 12 months, the Reserve Bank said.

“Comparing October 2011 to a year earlier, loans and advances rose by 1.5% or ust under NZ$5 billion. Weak credit growth reflects soft economic conditions, global market uncertainty and pressures on households and businesses to reduce debt levels,” the RBNZ said.

“Simultaneously, banks are experiencing strong deposit growth, with annual growth running close to 9% in October. This equates close to NZ$13 billion in extra deposits, taking the stock of retail deposits to about NZ$160 billion,” it said.

“While it appears that modest growth in credit could be met from rising deposits, banks also have maturing wholesale debt on their balance sheet. Banks are estimated to have about NZ$15 billion of maturing core funding over the next 12 months or so.

“If credit growth remains subdued and deposit growth remains strong, then much of that maturing funding could be met from retail deposits. If credit growth picks up, then clearly the banks’ funding requirements would increase,” the Reserve Bank said.

SOE sale effect?

Meanwhile, Governor Alan Bollard was not concerned about the government's pending mixed ownership model SOE share sell down, which is tipped to raise NZ$5-7 billion starting from late 2012. Finance Minister Bill English said last month that one of the intentions of the sell-down was to get money "out of bank accounts and helping build the economy".

“We’ve looked at the numbers in broad terms. It looks like the sorts of amounts we’re talking about from those mixed-ownership model sales, are likely to be a very small proportion of domestic deposits," Bollard told media.

In fact that NZ$5-7 billion would account for part of the NZ$13 billion increase in domestic deposits over the last year. The share sales may slow the growth in domestic deposits, but wouldn’t do much more than that, he said.

(Updates with comments on mixed ownership share sales)

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For a long time now I have argued against the govt/reserve bank policy of extremely low interest rates.

These low rates actively discourage savings

At the same time we have govt and reserve bank stating that they wish to encourage savings.

I believe it is time for political spin to give way to positive action

If we do not we will continue our slide down to third world status.

Interest rates should be increased to a level which will positively attract savings

Only then will we start on the long road to building domestic investment capital.

Without some domestic investment capital we cannot hope to get our economy growing once again and will need to continue to borrow from overseas. As your article says this overseas borrowing will get increasingly difficult.

So the answer is obvious- increase interest rates to a level that will attract savings

I am not holding my breath but I hope for some positive action in this regard.

peter martin

 

 

 

You could argue that lower rates will help us pay off our mortgages quicker and then we can start to save - so lower rates might increase saving.

NZ has had some of the highest interest rates in the OECD for a long time now - so if high interest rates encourage saving, then why do we have such a low savings rate?

I doubt many people decide not to save their money because of bad interest rates. Most people that have excess money will save it - its just that most people in NZ don't have excess money.

"NZ has had some of the highest interest rates in the OECD for a long time now - so if high interest rates encourage saving, then why do we have such a low savings rate?"

First, regardless of overseas rates OUR OCR is at a record low, secondly (at this stage) OUR banks (phhh aussie's) are still solvent.

 

My point is people need to stop comparing "apples with oranges"

 

Has that been proven though? I think it is more the case that the lower the interest rates, the more people can afford to borrow, and do borrow. Thus pushes house prices up, as people can afford to borrow more.

I think there is more incentive when the interest rates are high, to get teh paid off early, as people don't want to have to pay 15% interest on a house loan, which is what it was in the 80's. I think low interest rates are dangerous, and one of the reason NZ publically and privately owes so much money. I would be interested to see any graphs of NZ publc and private borrowings over the last 2 decades.

The best way to encourage savings is to have a high interest rates

 

Credit growth had peaked in 2007 before falling markedly leading up to the financial crisis. Since mid-2009 grown had been very tepid, with the stock of loans and advances at NZ$320 billion having barely risen over the last 12 months, the Reserve Bank said.

“Comparing October 2011 to a year earlier, loans and advances rose by 1.5% or ust under NZ$5 billion. Weak credit growth reflects soft economic conditions, global market uncertainty and pressures on households and businesses to reduce debt levels,” the RBNZ said.

Simultaneously, banks are experiencing strong deposit growth, with annual growth running close to 9% in October. This equates close to NZ$13 billion in extra deposits, taking the stock of retail deposits to about NZ$160 billion,” it said. 

This sums up the dysfunctional situation we endure -  the only evident growth is registered in rising negative real return deposits. -  and we expect to run a fiscal surplus by 2014/15 - give me a break.   

 

Yipee.Westpac is going to give me more than the present offer of 4.25% for 18 months.

Meanwhile i see heartland is offering 6% for 12 months.

So which one is more likely to fail to return your capital investment ng?

Will the gov ever let a 'bank' fail though?

Dam you Wolly you have opened my eyes to the truth.

Bless you

Beware of false prophets like Wolly...he's only bitter that he's missed out on fat profits !

 

"profits" are relative to circumstances and day by day those circumstances are looking grim. The true false prophet is our monetary system

Yeah...don't pay any attention to ole Wolly....he don't know nuffin...banks never freeze funds...honest it never happens these days...count on it...bank on it....harrrhahahahaaaa

Now let me count again the hundreds of thousands that came my way on the single copper mine play.

It's Friday Rob...you gonna get chicken soup and a new straw at the home today...sucker.

 

wolly,wolly,wolly....how many times do i have to tell you to stop projecting your rest home fantasies onto me as i sit here typing away in my million dollar home in sunny ?????.

you are right about banks,though ..deposits can be frozen and you are only an unsecured creditor with your money in a bank...but jermeiah was a bullfrog and we can leave the doomsday stuff to Morgan and the Hickster !

your single play on copper does not maketh the man,Wolly me ole Dolly...loneliness is obviouslyconfusing and muddling you , old chap, and i do understand..... so i promise to leave you be as you entertain the punters on this site with your ravings...good luck and happy christmas......sarkosy for santa , i say !

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