RBNZ wary of increasing use by banks of wholesale offshore funding to fill gap left by falling growth of local deposits; says banks raising deposit and mortgage rates to help fill gap; see long term rates having bottomed out

RBNZ wary of increasing use by banks of wholesale offshore funding to fill gap left by falling growth of local deposits; says banks raising deposit and mortgage rates to help fill gap; see long term rates having bottomed out

By Bernard Hickey

The Reserve Bank has highlighted the increasing use by banks of 'hot' wholesale money markets overseas as local term deposit growth has fallen behind lending growth.

It warned this opened the banks up to being susceptible to disruptions on those markets in the event of a new bout of global financial turmoil and it expected these pressures would force banks to compete harder for local term deposits by increasing interest rates.

The bank regulator made the comments in its half-yearly Financial Stability Report (FSR), in which it pointed out that if the recent divergence between credit and household deposit continued, the banks would have to increase their own borrowing from wholesale money markets.

"That would add to the already significant volumes of market funding that banks are expected to roll over in the medium term," the Reserve Bank said.

"Banks will need to replace about NZ$40 billion of market funding that will no longer count towards the Core Funding Ratio (CFR) within the next three years," it said, adding that changes by the Australian Prudential Regulation Authority (APRA) to its APS222 standard meant the New Zealand subsidiaries of Australian banks would have to reduce their reliance on funding from their Australian parents.

A significant portion of this funding would have to be raised offshore, the bank said.

"While CFR requirements will mean that most of this funding would be raised at longer terms, greater offshore funding increases rollover risks as banks will be required to raise funds more regularly, and in greater volumes, from offshore wholesale markets," it said.

The bank said the availability and cost of raising funds varied.

'Pressure on credit ratings'

"For example, a material increase in banks’ use of market funding could threaten credit rating downgrades, as credit rating agencies view the reliance on offshore funding as a key weakness of the major New Zealand banks," the bank said.

"In addition, a number of potentially large international vulnerabilities could disrupt global funding markets, including: a sharp unwinding of vulnerabilities in China; further stress in European banks and economies; a rise in protectionism in global politics; and possible spillover effects on emerging market economies if US interest rates rise," it said.

"Some of these shocks could disproportionately affect New Zealand banks. For example, investors could worry about the impact of a crisis in China on the solvency of New Zealand banks, given China is the second largest market for New Zealand exports and a sharp reduction in New Zealand export demand would harm the domestic economy."

'Rates have bottomed out'

Governor Graeme Wheeler also pointed a recent rise in long term interest rates globally and the rise in local term deposit and longer-term fixed mortgage rates as a indicator that rates may have bottomed out.

"We've certainly seen an increase in mortgage rates just as we've seen an increase in deposit rates as well, as banks are finding that their credit growth is exceeding their deposit growth and they are having to basically access offshore wholesale finding, which is more expensive, and also they are having to compete more to try and get deposit inflows as well. So you are seeing those rates rise," he said in the news conference after the release of the FSR.

Wheeler later told the Parliamentary Finance and Expenditure Select Committee that "we've probably seen the bottom now in long term global interest rates."

Deputy Governor Grant Spencer said the bank had cautioned borrowers for some time they needed to be careful in the event of a rise in interest rates.

"People need to be very careful about borrowing increasingly large mortgage amounts at very low interest rates, because it is only a matter of time before rates do increase, and if you look internationally, in recent weeks there are indications that those global interest rates have turned up," Spencer said.

"How far that goes in terms of the trend remains to be seen, but I think a lot of people are saying that we may have seen the bottom of the interest rate cycle."

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It will be interesting if mortgage rates do rise in places like the UK, which seem to be paying between 1 and 2%, and what effect that would have on property prices., and what level of rise could they cope with without defaults, coming off such a low base?

The UK still has QE in place so liquidity is still being pumped into the system so not likely to change in near term.

6% on Term Deposits soon, any one ?

Well we know the OCR is unlikely to change in near term so if a bank offers 6% for a term deposit I wouldn't want to lock up my money with a bank that would be effectively showing signs of distress by the rate they were offering.
Any bank offering more than 3% over OCR would be an amber warning light to me. It would start to suggest they can't get adequate funding in the bond market.

In July 2014 my 5 yr term deposit with Kiwibank was 5.75% (on maturity). So its still got about 2.5 yrs to go before it matures.

You are ok then! From a personal perspective I chose never deposit money with a bank for more than 1 year. I was in London during the GFC and know people who lost their lifetime savings with the Icelandic Banks. Others with funds at Lloyds and Barclays had sleepless nights.

2.5 years gambling that an OBR will not occur, not odds i'd take.

Heartland is now offering 3% for on call deposits, so anything's possible.

https://www.heartland.co.nz/content/investors/savings-accounts/heartland...

The question is why?

With recently heavily expanded/exposed banks, the only question I ask myself is "when".

The days of super cheap debt are over...some developers are struggling to find funding as building costs rise.

http://www.abc.net.au/news/2016-11-30/anz-boss-says-economy-showing-emer...

Yet the official cash rate will not be rising, in fact it will be dropping, just no one will lend at this rate, interesting.

Our banks are borrowing short and lending long on an unprecedented scale.

They are heavily exposed to international finance that couldn't give a rat's patootie about the financial and political stability of this country. Already, the Australian banks have been commanded by APRA to repatriate profits from their NZ operations in a manner that imperils those operations, at the same time officially forbidden from ever bailing them out. Death by design.

Unfortunately the time for regulators to act was a decade ago. Between our bubble debt, our burgeoning government debt, and our relatively undiversified economy (tourism, dairy, cafes, students, immigrants, building houses for students and immigrants) here's hoping we have some firm friends in the IMF.

When the time comes, we'll need all the friends we can muster.

Umm, the IMF gets its money by levying participating countries, I think NZ is liable for 2~4billion? if (when) its ever called on.

The point is I think we are going into a GLOBAL l 2nd Great Depression when many if not most countries will go bankrupt and need the IMF, the IMF however wont have the funds to help. So really I cannot see the IMF helping NZ much.

Also you need to separate out the private debt and the public debt. Govn NZ actually doe not owe that much, so with the OBR technically most of the prvate debt is just that private and not Govn "owned"

Also "APRA to repatriate" do you have a link please? ie evidence? Its not unusual for private banks to take their profits home, in fact its expected.

"regulators to act" Not regulators but Government IMHO. Like Labour before it National didnt want to stop the housing Ponzi scheme because that would have made them lose an election or be un-electable and probably cause a recession. Which comes back to us the voter, we didnt want protection as long as we were making lots of money via asset appreciation. We still dont want it IMHO as evidenced by voter rejection of the CGT etc.

IMF = Not a reference to our membership but to the bailout treatment that is coming to us, should we remain on the same reckless financial path we currently tread.

Government debt:
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11468289
Private debt:
http://m.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&object...
A private debt crisis on the scale we are courting will always result in significant impact on the public books, be that increased spending, decreased tax take or an eventual collapse in GDP.

Our public debt has markedly increased in recent years and the trend is for that marked increase to continue.
Here is a good article on Treasury's recent announcements around our perilous long term outlook:
http://thespinoff.co.nz/society/28-11-2016/nz-baby-boomers-are-building-...

APRA = any Aussie bank disclosure statement. See below, "General Matters":
https://www.westpac.co.nz/assets/Who-we-are/About-Westpac-NZ/Disclosure-...

To summarise, we're in a real spot of bother here.

looks like the market has turned already as we now have the depositors boasting mine is bigger and longer than yours!

OBR....

yeah but deposits are effectively unsecured loans under OBR?

They always have been. The OBR just makes it obvious, in your face, IF of course you open your eyes.

Highly leveraged property investors may soon be feeling the pinch. Increasing interest rates, minuscule rental yields, sky high debt, prices plateauing/falling? When it rains in pours.

The irony of it the Reserve Bank is worried about the banks increasing use of wholesale offshore funding yet wouldn't dare consider implementing loan to income ratios (which would reduce the amount of offshore funds required )

They need to sit and wait and watch the prices go even higher up. I see another record broken for Auckland house prices today. Well done Key & Co.

It's political

Good article OpenPensionResolution

" If no policy changes are made, by 2060, when current students reach retirement age, government debt will be 206 per cent of GDP. In other words national debt will equal two years’ income, worse than the current debt of countries world famous for being fiscally screwed such as Zimbabwe (203 per cent) Greece (179 per cent), Italy (133 per cent) and Portugal (121 per cent). No matter how well you prepare for retirement, you’ll be living in a banana republic.

The reason? Ageing baby boomers who will be more numerous and longer-lived in retirement than any generation before them. Right now there are four working-aged taxpayers supporting every retiree, but by the time current university students retire there will be only two.

The cost of pensions and healthcare as a share of the economy will double, the government will run large deficits, and the international financial community will demand higher interest rates on New Zealand government debt, leading to larger deficits. A death spiral that ends in that same community imposing “tough medicine” for the New Zealand economy as a condition of rolling over the government’s debt. This has happened to Thailand, Indonesia, Argentina, and Greece during recent crises, "

Good job all those Boomers have paid off their mortgages then... at least their housing needs will be covered. Phew! I mean, it's not like loads of them have heavily leveraged themselves on expensive second, third homes believing that they will live on capital gains or high rental yields in to their dotage, contributing to a fat and swollen property bubble! ;-) .... oh wait....

*weepsintomytea*

What happened to all the stress testing the Reserve Bank did and said that all the Banks looked Okay. Hasn't take long for the Ball to turn around, has it. Good luck with an OBR. Brexit and Donald Trump will look like chicken feed by comparison

The world is kidding itself if it thinks we can transition from zirp to to rate rises with zero pain.