New Zealand's mainly Australian-owned "vanilla" banking system may have looked staid and boring by international standards over the past decade, but as the global financial crisis grinds on, staid and boring is not a bad thing right now.
While that means we and Australia, which owns more than 90 per cent of our banking industry assets, have so far dodged the bank failures and Government bailouts seen in most other Western economies, both countries' status as debtor nations mean that should the crisis endure or even worsen, there is potential for things to get much, much uglier.
Bankers generally have a reputation for conservatism and we should be thankful that ours in Australasia have run true to type. They have largely stayed clear of the complex credit derivatives whose collapse in value triggered the crisis, and have for the most part been considerably more conservative in their lending practices than their United States and European counterparts.
Almost four years ago, before anybody but the most uncannily accurate forecaster had any inkling of the impending credit crunch, the Herald took a look at the stability of our banking sector.
Then, Massey University head of banking studies David Tripe said the sector was as safe as houses, with banks' lending heavily weighted toward the mortgage market.
Lucky then that our housing market has so far escaped much of the losses seen in the US market.
New Zealand banks, for the most part, didn't indulge in the riskier lending widespread in the US and UK.
Moreover, with loans written by New Zealand banks remaining carried on their balance sheets until they were discharged, rather than being bundled together into securities such as the now notorious CDOs (collateralised debt obligations) and CLOs (collateralised loan obligations) and onsold, it was in their interest to ensure borrowers were capable of repaying them on a long-term basis.
In some US states defaulting borrowers can essentially walk away from their homes and financial commitments with little comeback. Here in New Zealand the banks can pursue you to the grave.
When asked last week how safe the sector was in the new and far more hazardous environment, Professor Tripe said: "As safe as the Government".
The retail deposit guarantee announced in October means nobody need fear losing their savings in a bank failure in this country, at least for the foreseeable future.
But the guarantee, which the Government had little choice but to implement once Australia chose to go down that path, has created a new set of problems, including "boundary issues" of who should be covered, and what should happen when the current scheme runs out in October next year.
But that is 18 months away, and right now we're facing a far more immediate and serious problem.
As underlined recently by Reserve Bank Deputy Governor and head of financial stability Grant Spencer, a key risk for the country was "the willingness of foreign investors to continue to fund the economy".
The major local banks get more than 40 per cent of the cash they lend to customers from the overseas markets, which locked up last year.
Mr Spencer warned the country would face a painful adjustment if foreign finance was withdrawn or made a lot more expensive .
This is precisely the risk highlighted this week by New Zealand Institute's Benedikte Jensen.
"In the short term, New Zealand faces risks of a substantial decline in business activity and investment because New Zealand companies are so reliant on bank financing and that bank financing is being severely constrained," she said.
The risk was identified as far back as April last year in accountancy firm KPMG's annual report on the banking sector which warned of the "worrying" prospect of "credit rationing".
Since then the credit crisis has worsened considerably and so too has pressure on bank funding.
"In certain segments and certain banks we are now seeing credit rationing," KPMG partner Godfrey Boyce told the Herald last week.
That was clearly the case in the property development sector, where a lack of bank funding for developers was reported as a contributing factor in the failure of several finance companies last year.
But Mr Boyce indicated the famine had spread to the small business sector, particularly in the service and retail sectors, restaurant and cafes.
"Anything where there's uncertainty over cashflow and there's seen to be a dependence on discretionary spending. Those are the sectors where the banks are being pretty careful."
But it's a far from clear line that separates prudent tightening of credit criteria and credit rationing.
The banks themselves are at pains to emphasise they are still lending to businesses and it's worth remembering that money lending is their business. The international situation would need to be cataclysmic before they turned the tap off dramatically.
Prompted by the perception it was sharply cutting back on lending, ANZ National last week took the unusual step of announcing $4 billion in new lending for businesses this year. But when questioned more, it said this was in fact about the same amount of new lending it extended last year.
What is clear though is that with long-term funding particularly difficult for banks to secure, they are less willing to lend long term to corporates, and that has resulted in the current booming market for corporate bond issues to retail investors.
For a true picture, all eyes will be on banks' results and quarterly disclosure statement for signs of stalling growth in their asset and loan books. Expect them to portray any decline in lending as stemming from reduced demand rather than supply.
In the meantime the Reserve Bank itself has been actively working to help ensure the banks have sufficient funding with a range of what it calls "liquidity measures" which are essentially lending facilities using high-quality bank assets as security.
So far, under its term auction facility, one of its key measures, it has extended $6.55 billion in funding.
The banks have not been accessing this facility in the past few weeks, which could be an encouraging sign.
According to PricewaterhouseCoopers partner and banking expert Paul Skillender, it may indicate the extent to which overseas markets are beginning to open up again. "Banks are getting better access to funding than they were a couple of months ago. I'm aware of a number of banks that have accessed the US commercial paper market, a shorter-term market."
Mr Skillender also says he is aware some local banks have accessed overseas term funding, crucial longer-term money that has been far harder to get.
"It's not major sums but it is a case of getting funds away in preparation for those term fundings refinancings that are going to fall due in the next couple of years," Mr Skillender says.
This is encouraging, but any more dramatically bad news out of the world's financial centres, such as was almost a weekly or daily occurrence in September and October last year, could see things grind to a halt once again.
Assuming the worst of the market crisis is now behind us, it's a given that the days of cheap money which fuelled the credit boom of the past decade are over.
Interest rates are pretty low at the moment but international investors will likely demand higher rates once they do begin lending to our banks again and that will find its way through to your mortgage, credit card and business borrowing rates.
Any direct correlation between the Reserve Bank's official cash rate and lending rates has long gone.
What's more, it's probably not unreasonable for banks to increase their net interest margin in a riskier environment such as the one we're now facing as they have to allow for a higher level of bad loans.
For the past year now, each new set of bank results shows a steep increase in past due assets, loans that are beginning to go bad, and impaired assets - those that have gone bad.
These measures have shown increases 40 or 50 per cent or more in a year and will, as the banks themselves say, get worse.
But then, said Mr Boyce, the rises were off incredibly low levels by historical standards and they had yet to reach "statistically significant levels".
"We're certainly going to see this year in the banks' results a number for credit losses that starts to look more normal in the context of what we saw through the 1990s," he said.
"We're back to the real world, if you will, because the last decade hasn't really been the real world."
While Mr Skillender says bank profits will inevitably fall, they are still well capitalised and operating with a good margin of safety.
"I think it's still a sector that's obviously going to have some challenges over the next 12 to 18 months but it's a sector, certainly compared to elsewhere in the world, that is in pretty good shape."
With their huge profits, most of which flows back to Australia, and the lack of transparency regarding their operations in New Zealand, the major banks are often regarded with suspicion and in some cases a kind of nationalistic hostility which has been freely exploited, albeit in a tongue in cheek fashion, in state-owned Kiwibank's advertising.
But if New Zealand's banks must be foreign owned, there are probably no better owners than the Australians, says Mr Skillender, a Queenslander.
"Apart from the physical proximity and legal similarities, at the moment Australian banks are in fundamentally better shape than a range of other Western banks."By Adam Bennett Email Adam