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Double shot interview: Amanda Morrall talks to Gareth Vaughan about the security of term deposits given the Eurozone crisis

Double shot interview: Amanda Morrall talks to Gareth Vaughan about the security of term deposits given the Eurozone crisis

By Amanda Morrall

Just how safe is money in the bank given the prospect of a eurozone break up? And will New Zealand, at the bottom of the world, be any better off for its remoteness from the cancer at the core of the sovereign debt crisis?

New Zealand banks are generally believed to be in better shape than most, given tighter lending regulations and also the security afforded them by their Australian parents, but what about foreign banks operating in New Zealand?

Rabobank, the European bank with the largest presence in this country, has more than NZ$3 billion in Kiwi retail deposits which has more than a few wondering just how safe money in the bank really is.

We received the following email from a reader and thought we'd tackle it as a wider story:

"I have a large sum of money on a one-year term deposit with RaboBank maturing 31st March 2012. I am watching events in Europe with concern - is RaboBank in any danger of collapse of some sort, or can I rest easy ?''

As financial journalists, we cannot offer any advice, however we can share our knowledge and understanding of how the situation in Europe could potentially impact financial institutions and retail deposits that are domiciled here.

Interest.co.nz banking and finance editor Gareth Vaughan, who interviewed Rabobank's global CFO Bert Bruggink earlier this year, suggests Rabobank, despite a recent downgrade, is better placed than most to handle any shrapnel from a eurozone break up. (See Gareth's article from an interview with Bruggink here).

"Rabobank has a reputation of being one of the most conservative banks in Europe, if not the world,'' said Vaughan, of the Dutch cooperative which has its roots in the farming and agriculture sector.

Relative to other banks, Rabobanks' exposure to Europe's most financially vulnerable nations (Portugal, Italy, Ireland Greece and Spain) is relatively minor; US$400 million.

"To put that into context, the group has about €269 billion worth of assets, so it's exposure to that part of the world is very small,'' said Vaughan.

"If you look at some of the French banks, like Credit Agricole, they have subsidiaries, or stakes in banks in Greece, Spain, and Italy, so they are much more exposed to that part of the world than Rabobank.'' See Gareth Vaughan's article on Credit Agricole's bond issue in New Zealand.

Despite its downgrade from AAA to AA, Rabobank remains one of the most highly rated privately owned banks in the world making it among the least likely of banks registed in New Zealand to fail, adds Vaughan.

"In short if the worst was to happen to Rabobank frankly there wouldn't be much left of the European banking sector.''

The reason for the downgrade had less to do with Rabobank's financial operations and more to do with Standard & Poor's rating system, Vaughan adds.

"Basically Standard & Poor changed the way they rate banks,'' explained Vaughan. (For more on the downgrade click here).

"They're saying that the neighbhorhood where the bank operates is more important than they were previously given credit for. Whilst a downgrade is still a downgrade I wouldn't be too worried about it.''

As well as holding NZ$3 billion in New Zealand deposits, Rabobanks has about NZ$8 billion in loans to New Zealand farmers on its books.

As a rural specialist, it has been one of the fastest growing lendors in the primary sector. (See interest.co.nz reporting on Rabobank's last disclosure statement here).

According to interest.co.nz's leverage tables, measuring assets versus shareholder funds, Rabobank comes in second place behind ANZ, with assets exceeding shareholder funds by 11.8 times. It's lending to the rural sector has grown over NZ$400 million in the September quarter from the June quarter.

'Wine exposure'

A potential vulnerability is Rabobank's disporportionate exposure to the wine sector, which has suffered through the global downturn.

As a New Zealand registered bank, Rabobank is regulated by the Reserve Bank of New Zealand and therefore subject to the same capital requirements and rules as other New Zealand-based banks.

With the Government Guarantee scheme on retail deposits all but expired, investors nervous about the days ahead -- rightly or wrongly -- shouldn't expect any safety net.

The extended retail deposit guarantee scheme, due to end Dec.31, covers four remaining companies: Heartland, Fisher and Paykel Finance, Wairarapa Building Society and, PGG Wrightson which was taken over by Heartland recently.

Vaughan said Fisher and Paykel and Wairarapa Building Society stopped taking deposits covered by the guarantee some time ago and Heartland (for which the scheme basically exists now) is also steering people away from the Guarantee.

"They are talking confidently that they are well prepared to deal with it,'' he adds. See more on this here.

Stress tests

Financial stress tests, which would appear imminent for New Zealand banks, might also offer some assurances for depositors or at least some guidance as to the safety of banking institutions across the board. See Gareth's article on stress tests.

Bank regulators on both side of the Tasman cooperate sporadically on so-called stress tests and banks do their own tests ones as well, notes Vaughan.

"We had some reports out of Australia that the Australian Prudential Reuglation Authority is doing some pretty strident tests on the big Aussie banks because of the concerns about what's happening to Europe and how that could roll on to hit Australia via China their key trading partner. RBNZ does tend to partake in these tests and ANZ, ASB, BNZ and Westpac are obviously subsidies are big four Aussie banks so it's fairly safe to assume the RB will be taking part in the Australia stress testing."

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24 Comments

If the banks were actually going to fail, would anyone honestly tell us?  Like MFG, Bear Sterns, Lehman, CityBank etc.  Did anyone say they were going to fail?  Or did they say the bank was fine?

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Skudiv

We watch the banks more closely than any other media outlet. We read every General Disclosure Statement. We talk to the Reserve Bank regularly.

If we think there's a problem, we'd say so.

I called out Hanover Finance and Strategic Finance in April 2008 months before they failed.

Have a watch of the video. We've been around for a while. Have a little faith in us.

cheers

Bernard

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Good on ya.

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1 for the price of 2 : The absolute  reverse of a bargain ! ....... now ole Gummy is thick at the best of times , but lemmee run this past yer : -

... Amanda Morrall of interest.co.nz does a double shot interview with Gareth Vaughan of interest.co.nz ....... and then she writes up a story that Mr Vaughan could've cobbled together by himself ...... saving both the firm's  time , and coffee .....

...... are you guys in training for " jobs " in the public service , or in local government ......

Or was it just a slow day , and Captain Calamity happened to be out of the office ?

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Who cares Gummy, at least we got to see Amanda:-)

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GBH it's the same thing the news do when they go "live" to one of their reporters who's somewhere else (usually the same city) to comment on a story. But where they are is unrelated to the story. It just provides the sense of drama and more cuts in the filming.

Something similiar here

http://www.youtube.com/watch?v=YtGSXMuWMR4

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Gummy, gummy, gummy...

Sigh.

We received a question from a reader and thought it would be useful to do a video question and answer between Amanda and Gareth.

We find some people prefer this format and it means we can spread the information more widely out to youtube.

You're right that a lot of this information is out there in bits and pieces in various places, many of which are linked to in the story.

We're trying to be helpful to as many readers as possible.

cheers

Bernard

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Sorry  , Captain Calamity , Gummy was trying to save you money , taking a leaf out of your book ....... recall the happy days of yore when you gave us a daily list of things to do to stretch the budget .....

...... latte's once a week  , getting a goat to mow the lawn , growing spinach at home , Budget baked beans , cycling to work , do-it-yourself surgery & hip-replacement ops ....... that sort of thing .

Times are hard you know , it's tough out there , on Struggle Street .

...... aha ha ha de haaaaaaaaaa !

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Thanks, husband was talking about this just the other day as we have some money in Rabo. I sent him a link to here. P.S cute jacket. :)

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Trust went out the window long ago. Good luck to anyone making a 12 month tern deposit in any bank and "we wish you well for the future" to those who bought long term corporate bonds or shares in any bank.

The tell tale for me, and you will never get the honest answer, is the percentage of total personal wealth the bank bosses and directors of any bank, have invested in the common shares and bonds of the same bank.

They will know the truth and they will be the first to run.

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Shame on you Parky...you borrowed credit from the very same mob...of all the hypocrisy....how do you sleep at night?

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Hypocrisy of the worst kind , Iain ........ you whom rail against the bankers , are beholden to them for a roof over your family's head !

...... tch tch ! ...... bad form old man , very bad form !

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Well Mr Parker,  not so much of an idealist then are we. Imagine that, supping with the devil whilst paying him for the pleasure.

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So in the end, despite all your whinging and complaining and railing against all that you despise you get a mortgage.

 I actually agree with most of your idea's. But you have to set an example. You can't talk the talk without walking the walk.

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Here's the thing Parky, tale of two farms  in Marlborough...one bought the BS from the parasite and borrowed to rush into grape production, tossing away the lamb...that was in 04/06....the other farm shut the gate on the parasite..

Today the grape producer is financially dead....the lamb producer is having the best run in decades.

The parasite is desperate to make friends with the lamb producer but in a stupid brainless act is trying to sell the price bloated vineyard to the lamb producer...hahaaahaaahaaaaa....

Don't borrow from the parasite....never borrow from the parasite....

Now the best thing you could do Parky is to work on boosting the peasant understanding of what a credit union is....how they work in NZ...why the peasant would join one...get the message.....while you are at it Parky, think about how the Armish operate...the mutual community...the barn raising as a concept to be pushed in NZ...no parasites in a barn raising Parky...

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A third and smarter farmer sold his farm to the dumb money.  Went out and now has a much, much larger farm freehold, and can tell the parasite to stick it.

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Some people should chill out a bit.  The game is rigged, inflation takes away from your savings as much as the banks do, inflation goes to the govt and the banks as well.  Probably borrowing from a CU is the least bad option.

"Dig" by "Incubus"... 

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Ummm, bank lending causes inflation. More so than any government, thats why 98% of the money supply has been originated as bank credit in NZ. In fact inflation should require that the tax take increase year on year, but extra government debt has avoided this to some extent. None of this can be described in any way as sustainable however of course.

Borrowing from a credit union means that profits acrue to you as an owner, but the effect on every other user of the monetary system is the same as borrowing from a bank.

I don't happen to agree with Iains conspiracy version of events but, criticism of Iain for participating in the monetary system is of course stupid.

 

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The Banks in NZ are as safe as houses...better yet they are as safe as farmland...and the fact is the RBNZ is finally.....after 3 years of crisis....doing a number on spinning the good spin about how safe the banks really are....only because the same is taking place in Aus you realise...and they are only doing it because the awful stinking truth about the utter banking farce in europe is started to pong the whole continent...promising to corrupt the 'uncorruptable' banking system down here!.....harrrrrrrrhaaaahaaaaaaa

Hey Bolly....do ya reckon we have us anough credit flowing through the economic corpse today...better pump in a bit more mate....

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Any ideas on how the Euro crisis might affect borrowers?  Will it really cause an increase in mortgage rates through refinancing rates?  Or are the local banks just softening us up for no further falls even if the OCR decreases? 

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You have to expect rates to rise MB...how far and how fast is anyones guess..and that's if the EU farce doesn't implode with banks runs and so forth...if that happens and it certainly could, failing banks will cascade across the world...explains Bollard's wee bit of spin about testing the banks...

So bet on rates rising and keep your cash liquid....when it hits the fan you will have only a day or so to grab what's yours before it's frozen solid.

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Wolly, if you have cash in the bank on call and things start looking ugly, what do you do with it in that couple of days?  NZ govt bonds? 

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Got to agree with Wolly.

First stage would be an end to new credit. Nominal rates might not move, but chance of a new or increased loan zilch.

Next, big pressure for loans to be repaid. Various tools available here, but making interest rates painful is certainly one. Simultaneously big efforts to make depositors stay, more upward pressure on interest rates.

Next, failing bank contagion comes to us. Deposits frozen, Tier one instruments demolished.

 

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Bottom line,the world is massively exposed to Europe, and NZ is massivley exposed to the world.  Sure there are few links in the chain between us, but it is still a chain.

It's safe to say the carnage in Europe is the start, but in no way is it possible that it will be contained in Europe.

A housing crash representing a tiny fraction of US GDP, caused a sharp contraction all over the world.  We are talking about government debts, representing more then GDP in most cases.

The can is here AGAIN, lets give it another kick.

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