KEY POINTS:
A domestic banking crisis caused by the absence of a wholesale deposit guarantee is not imminent because the industry's Australian owners and the Reserve Bank have the capacity to ensure sufficient liquidity, say commentators.
A Government guarantee for banks' wholesale funding, which would see the taxpayer stand behind
the approximately $300 billion local banks borrow from big lenders both overseas and in New Zealand, is looking more likely.
On Sunday and again yesterday morning, Finance Minister Michael Cullen confirmed Treasury and Reserve Bank officials were working on such a scheme.
Also on Sunday, National Party leader John Key called for a bipartisan effort to speed up the introduction of a scheme to avoid a flight of funds from New Zealand to Australia.
The Government faced criticism last week for not introducing a wholesale guarantee at the same time as applying one to retail deposits.
The same day Australian Prime Minister Kevin Rudd announced both a retail and wholesale guarantee.
That sparked fears of a flight of capital from New Zealand banks to Government-guaranteed Australian ones.
There were predictions local banks would find it more difficult and expensive to access funds internationally without such a guarantee.
More pressure for a wholesale guarantee came late last week amid rumours that liquidity was fast drying up in the local banking sector, which would result in banks severely cutting back on lending activities, exacerbating the economic slowdown.
Yesterday Cullen downplayed the urgency for a decision. "We have time to work through it," he told National Radio.
BNZ economist Stephen Toplis, who led calls for a wholesale scheme last week, said it was appropriate for New Zealand to "have a little wait and see" until further details of the Australian scheme were released.
"You wouldn't necessarily have to adopt exactly whatever Australia comes up with. It's all very well saying we want a system like theirs but we don't know what theirs is and perhaps we might not after we see it."
Depending on its shape, the Australian scheme might not necessarily trigger the feared flight of capital, he said.
PricewaterhouseCoopers partner Paul Skillender said he would be "hugely surprised" if New Zealand did not adopt a wholesale scheme, but it made sense to see how other schemes unfolded "to ensure your own fits alongside them".
In the meantime, Toplis said funding from the local banks' Australian parents, combined with recently introduced Reserve Bank facilities which allow banks to use mortgage-backed securities as collateral on short-term loans, "could probably keep things ticking over for quite a long time".
"There are a number of funding avenues before Armageddon hits."
KPMG's Andrew Dinsdale agreed but said the first port of call should be the banks' Australian parents.
"They've got wholesale funding guarantees, why aren't they funding their subsidiaries?"
Some commentators have pointed to limits on the amount of cash the big Australian banks are permitted to lend to the subsidiaries by the Australian Prudential Regulatory Authority (APRA).
But Dinsdale said Australia's banks had a degree of responsibility that came with their 90 per cent ownership of the New Zealand banking industry. If APRA did not allow them to support their subsidiaries sufficiently, "perhaps APRA shouldn't be allowing its parent banks to have investments in New Zealand".
Dinsdale acknowledged that liquidity in the local banking sector was now "tighter than it's ever been".
"Talking to a couple of the chief executives, they are rationing the amount of money they are lending. They are saying they want to be liquid."
That said, the local banking industry remained "very well capitalised and very strong".
Toplis said there were some signs that overseas credit markets were beginning to loosen up. However if the situation was to deteriorate once again, there would be more big problems for the domestic economy.
"If we can't get the extra funding in, we can't do the extra lending out which means a heavy restriction on investment activity."
