Investors in bank deposits need to know that their bank has the liquidity to operate safely, with sufficient margin to tolerate unusual stresses

Investors in bank deposits need to know that their bank has the liquidity to operate safely, with sufficient margin to tolerate unusual stresses

By David Chaston

Banks exist to make loans.

They get their funding from a number of sources. The largest source is depositors.

But they also borrow from wholesale markets.

Oddly, shareholders provide only minor support via their investment.

It is this low support that gives them outsized returns because these institutions are highly leveraged.

The Reserve Bank’s new Dashboard tool allows us to inspect these core banking structures.

New Zealand’s retail banks held $319 billion of customer deposits as at the end of March, plus they had borrowed another $96 billion in wholesale markets. They pay interest to attract some of these deposits.

NZ$ mln Deposits Debt securities
ANZ 100,771.2 27,078.2 5,565.0
Westpac 61,665.4 18,175.0 1,949.5
BNZ 61,270.9 23,362.6 1,228.6
ASB 58,694.6 23,538.8 1,044.0
Kiwibank 16,146.8 2,338.7 65.5
All others 20,409.3 1,878.6 9,560.0
  ------------- ------------ ------------
Totals 318,958.2 96,371.9 19,412.6

Those same banks had loaned $412 billion. It is these loans on which they earn interest income.

NZ$ mln Cash and
bank deposits
  Net loans
and advances
ANZ 3,770.9 15,091.4 122,718.7
ASB 2,239.8 5,805.2 81,428.8
BNZ 3,905.8 6,241.1 80,216.4
Westpac 3,110.7 5,381.9 79,536.7
Kiwibank 693.4 1,057.6 18,207.7
All others 1,582.9 3,904.9 30,199.0
  ----------- ------------ -------------
Totals 15,303.5 37,482.1 412,307.3

The loan-to-deposit ratio is a quick and easy way to assess a bank’s liquidity risk. But it is a very superficial measure.

  Loans to deposits Loans to deposits
+ debt securities
Loans to Deposits
+ Securities
+ other borrowings
ANZ 122% 96% 92%
ASB 132% 102% 100%
BNZ 131% 95% 93%
Westpac 136% 97% 96%
Kiwibank 113% 98% 98%
All others 148% 135% 95%
Totals 99% 95% 129%

Where these numbers are over 100%, that says there are more loans than deposits, the balance needing to be funded from other sources.

Among the smaller banks, TSB stands out because it has an unusually large excess of deposits over its loan portfolio.

The RBNZ (like any banking regulator) rightly views loan-deposit ratios as superficial.

But the regulator's measures are more technical and harder to understand.

The RBNZ's primary liquidity measure is the Core Funding Ratio. This is a ratio of funding to loans and advances.

(“Funding” measures where a bank gets its money to lend from).

The Reserve Bank requires banks to get a minimum amount of funding from stable sources called core funding. The minimum amount of core funding is currently set at 75% of a bank’s total loans. Banks must maintain their core funding ratio above 75% on a daily basis.

All comfortably exceed that 75% test.

Technically, core funding (or more properly, one year core funding) is the sum of;

- all funding with residual maturity longer than one year, including subordinated debt and related party funding,

- plus 50% of any tradable debt securities issued by the bank with original maturity of two years or more and with residual maturity at the reporting date of more than six months and not more than one year,

- plus non-market funding that is withdrawable at sight or with residual maturity less than or equal to one year, applying the percentages in Table 2 to such funding falling within each size band,

- plus Tier 1 capital.

This is the latest core funding assessment:

  % % %
ANZ 89.8 75.0 14.8
ASB 85.3 75.0 10.3
BNZ 86.2 75.0 11.2
Kiwibank 88.8 75.0 13.8
Westpac 83.5 75.0 8.5
All others 101.1 75.0 26.1

ANZ has the highest core funding ratio of the five main banks at 89.8% while Westpac has the lowest at 83.5%. In fact, Westpac is the only bank with an excess over the regulatory minimum of less than +10%.

The high level for “All Other” retail banks is essentially because of TSB’s excess position. It is has a remarkable 53% more in funding (deposits, cash, securities) than it has in loans outstanding. The Co-operative Bank also has a strong position in this regard. Without the weighting of TSB, the “All others” actual would be 93.8% - still well above all the main banks. Only ICBC (88.4%) has a core funding ratio lower than ANZ, the best main bank.

This view of ‘core funding’ is better than the ‘loans-to-deposits’ view because it focuses the exposures only on the next twelve months. In a time of stress, a depositor will want reassurance that the bank has enough resources available now or in the near future.

The two measures compare like this …

  Core funding ratio
Loans to deposits ratio
  % %
ANZ 89.8 92.0
ASB 85.3 91.3
BNZ 86.2 99.6
Kiwibank 88.8 98.1
Westpac 83.5 95.5
All others 101.1 94.8

(In the CFR, a higher value represents more safety margin, whereas in the LDR a lower value represents more safety margin).

By weighting for time, Kiwibank’s position is better, ASB and Westpac are weaker using the Core Funding Ratio measure. TSB has the best safety margin in both measures.

Measuring relative bank liquidity the RBNZ way draws in the shareholder equity investment. But that is ignored in the loan-to-deposit method.

You can inspect the Core Funding Ratio and compare it between all banks using the RBNZ Dashboard tool.

You can also do the same numerical comparison using our [simpler] Bank Metrics Tool. Both tools use RBNZ data. At this time, only March 2018 data is available, but as time goes on, each new quarter will add to these resources.

Banks exist to make loans. But they need funding to do that and the regulator requires certain minimum levels. All New Zealand banks meet those levels, although one bank runs closer to the wind than its peers – and it may not be the one you might assume.

There are a number of ways to assess bank liquidity. We are fortunate that the RBNZ mandated method is a much higher quality measure than the traditional metric, and with the new tools available the Core Funding Ratio is easily inspected, by bank.

In our next review, we will look in some detail at how much shareholders have invested in these banks and the sorts of returns they are able to generate from that investment.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


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Thanks David, this is a great article.

Not all "core funding" is long term! The application of arbitary factors to determine the core funding ratio mean it should be treated with caution . According to RBNZ's BS13, on-call deposits less than $5M are given a factor or 90% for inclusion in core funding. This is an absurdly high weighting to give to mobile funds: -if were nearer to the 60% that is applied to deposits of $10M it might make more sense. At the moment, this high attribution of on-call deposits to core funding and makes the core funding number near worthless. A customer need only split his $10M deposit into two accounts and the bank gains $2M in core funding, - nuts!.

Third table totals look incorrect...

David Chaston,

In more detail...

Why is it that the first column of the third table has primarily values on the order of 120-140%, but a total of 99%, and the third column has values around 95-100% with a total of 129%?

Why do the totals look incorrect in the third table?
If TSB has better excesses than most major banks, why is it’s credit rating lower than the others (A- while westpac has AA-)?

How come we don't get any analysis for HSBC?

Because they are not a NZ registered bank. They are here as a registered branch of HSBC Hong Kong. As such, they are not covered in the RBNZ Dashboard data.

I am afraid this ignores key matter: liquidity. This dries up real fast when no one trusts other lenders. Called counter-party risk. That is what happened in 2007-8. Liquidity is being drained from world finance system by reverse QE (QT) in USA and China. Plus interest rates rising in USA which leads rest of world. Also, see Emerging Market CDS exploding, and especially Turkey. Risk assessment is a lot more comprehensive than % of loans backed by deposits. Plus, elephant in room - NZ has NO deposit insurance scheme. Australia is exposed to trade war between USA and China and will need to choose a side. Its housing equity rests on mining and resource sales to China 65% of Aussie banks equity is in Aussie housing market. That is far higher than in EU or USA.

Hi David your comment "Oddly, shareholders provide only minor support via their investment." is difficult to understand but follows a lot of comment I have heard recently which suggests a fundamental misunderstanding of share investors. First up I own a number of share in NZ and Aus. For shares traded on the share market there is virtually no benefit to the company, other than providing an assessment of the value of the company. (I stress here that it is an "emotional" rather than factual assessment based on analysis). the only time companies actually benefit from shareholders is at an IPO where the management are selling off their (some) ownership to the public or at a share offering, usually discounted, to raise money for a specific purpose. So exhorting people to invest on the share market does not actually benefit companies, but does put those investors in a position to reap some of the profits that companies makes.

This of course should then lead off to a conversation of the actual benefits of investing and where to do so.

You have neglected to mention other forms of capital raising eg. Options and warrants, bond issuance and other benefits such as employee options, paying contractors/suppliers with equity, both of which reduce the companies cash burn, particularly in expansionary phases.

True, but those forms of capital raising are not necessarily from shareholders.

Options and warrants are shareholder capital injections.. or at least they are if they end up in the money.

It doesn't really matter who holds the shares and what price they paid for them, but as a group, their investment in the company is represented by the Equity/Shareholder Funds in the company. This is the 'support' that benefits a company and its operations. (Forget shares or capitalisation.)

My main beef is that Banks are very highly leveraged. Most other companies have shareholder support in the value of about 40-50% of the assets employed in their business. Sometimes more.

Banks on the other hand only have about 7-9%.

This juices their returns dangerously.

It is so dangerous that no banker would lend to a non-bank business if it had such high leverage. It would demand that shareholders increase their stake. (And in the GFC, banks wouldn't lend to each other for exactly this reason - it's dangerous.)

We shouldn't tolerate such a double standard, especially as these are large institutions central to the stability of our economy.

Shareholders of banks need to get a capital call to reduce what is dangerous leverage. Regulators are starting to understand this risk and are requiring more capital. But their approach has been timid to date.

Yes. I agree. Similar to the point I tried to make last week. Rather than an OBR on "unsecured creditors", a mandatory call on shareholders for cash injection? Otherwise a nationalisation of those shareholders shares that do not stump up cash in 72 hours, at a post crash price of course. Might require Banks to be listed locally first one supposes. That should be enough regulatory stick raising to get a better capital adequacy, and prudential performance?

Dont the depositors act as a form of shareholder as far as banks are concerned?

The dividends are represented as agreed interest rates????

This surely makes banks a different beast as far as shareholding percentages are concerned

I tend to view things the same way as Murray86.

I don't see share "support" as being of any worth. It is really just fake credit.

For example, At IPO a share is sold for $1.00. That is it's worth.

If that same share is now worth $100.00. The company doesn't have $99 more in "Support", Rather the shareholder has a $99.00 liability.

If the share price collapses, the company loses nothing, the shareholder loses everything.

Banks are TBTF, period. The Governments will always come to the rescue with more funds as has been ably demonstrated in the past, the recent mass rescue during GFC 2008 comes to mind,

The rules have changed. No Central Bank of the Government has the will/political power to increase capital/reserve requirements and reduce the leverage the Banks undertake, with some one else's money that too.

lol, Retired Poppy came to mind as I read this ..

Time to check on your bank RP, see if they still have your life savings there !!

He’s with Rabobank, I recall a month or so back he still thought his deposits were guaranteed by the Dutch parent company. That expired in 2015.

I thought they kept the guarantee for existing deposits, thats what the letter told me.

They keep trolling Retired Poppy, but you gotta hand it to the guy, he did research in to the safe places to put his cash, and right now, his capital is giving him a better return than property.

So if you were predicting trouble in the lucky country as many do thanks to exposure to china and their housing market, would it be a fair bet to back a NZ bank with a reasonable risk profile like TSB?

very long time reader, first time commenter here...
i have a qstn that im guessing some of the wise members on this site may have some input on.

here goes...
As rare and unlikely as an OBR would be... what would hypothetically happen if the customer had (for simplicity sake) 100k in a non on-call account (ie TD, which could end up as potentially wholly "frozen" during the aftermath and subsequent re-management)... however that same customer had a current outstanding mortgage of 100k too?

...would the customer have the option of "paying off" their mortgage in this case? as a way to minimise the pain and avoid having their 100k (savings) frozen indefinitely..

or would a firm line be drawn, TD frozen altogether (pending restructuring/resolution etc) and the mortgage repayments expected to be kept up with as a separate entity.

Its a hypothetical situation, never mind the calculations or wisdom/foolishness of having 100k in savings while carrying 100k of mortgage debt.

kind thanks in advance for thoughts, and for going easy on a financial bozo like myself.

I've wondered that myself ever since OBR came in.

I'm not sure either, but someone I know who has a lot more knowledge in these matters, paid off the (smallish) mortgage for both his adult offspring just in case that would happen.

Perhaps someone knowledgeable will give us the definite answer.

I’ll add a question:

Is an OBR event limited to each bank that fails or would it be industry wide? If Westpac fails do ANZ depositors get raided even if ANZ are fine?

No, its bank by bank. When Westpac fails it will be shut down depositors will get a haircut. Westpac will reopen with a government guarantee, so will be safe as the Govt, so arrange to move your deposits out of ANZ to Westpac to avoid haircut when it's ANZ's turn and get a Govt gaurantee after Westpac gets restructured..

Each bank is a separate legal entity. You can't steal money from one bank to prop up another failing bank, that would just be theft!

If one banks stressed the financial system sufficiently that there was a domino affect, hypothetically, there could be a scenario where multiple banks were subject to an OBR event, but personally I doubt it. There will be a government bail out before any single bank sinks the whole system. And the whole point of an OBR is to stop a bank failing, so one OBR might be sufficient to sure up the wider system. As I understand it, a financial crisis is about intra-bank liquidity.

Besides, as analysis has shown us with plenty of detail, NZ banks aren't in such a shabby state. If there is widespread liar loans then maybe the picture is worse than it appears, but based on what we do know, the banks are pretty healthy.

thks all and GN, for the input..

to clarify i had actually meant if hypothetically a customer held the 100k in term dep, and simultaneously held a 100k in mortgage debt with the very SAME bank.

new bank management comes in (in case of obr), freezes your 100k savings while they try to unravel the shambles that must have just occurred. You say "hey, i got 100k mortgage with you guys, and you expect me to pay that without hiccup while u freeze (perhaps indefinitely) the same amount as i owe you.. lets wipe one from the other"

Just curious is all.

I do have a mortgage (albeit smallish by modern standards), and i do have not-insignificant savings in term with same bank... carve it up and dissect it anyway you want.. but i view it as my sleep-well-at-night money.. job loss, illness etc.. im obviously diversified further than that... but im guessing im not the only one who carries both +ve and -ve balances within the same bank.. and wondered "what if"?

Im also not anywhere near believing such an event is imminent nor likely... just curious to the above scenario as i havent seen it discussed anywhere.

I would think you would get a haircut on your deposits, your mortgage would stay the same after all your mortgage is the banks asset and your deposit is it's liability.

So whack that cash on your mortgage now, it is better there than in a TD anyway.

tks andrewj, yes that does sound most likely.

Bad news I am afraid, your mortgage is a secured loan so repayments continue but you deposit is an unsecured loan so potentially frozen or partially/wholly lost. If a large amount of money was used to repay mortgages in the uncertain period of a Bank run not sure how it affect the liquidity and reserve ratios.