The Business Herald’s markets and banking reporter.

Credit concern could lift mortgage rates - expert

Shares in the big four Aussie banks all fell by 4 to 5 per cent yesterday. Photo / NZME
Shares in the big four Aussie banks all fell by 4 to 5 per cent yesterday. Photo / NZME

Global concern about credit risk could increase the funding costs of local banks and lead to higher interest rates for New Zealand borrowers, a banking expert says.

The cost of insuring corporate bonds has spiked amid fears about the credit worthiness of financial institutions, driving a worldwide sell-off in bank stocks, including a more than 14 per cent plunge by Germany's Deutsche Bank this week.

Shares in the big four Aussie banks - ANZ, Commonwealth Bank (ASB's parent), National Australia Bank (BNZ's parent) and Westpac - all fell by 4 to 5 per cent yesterday, contributing to a A$40 billion slump in the Australian sharemarket's value.

The Australian gauge of credit default swaps - essentially insurance policies against debt default - jumped to its highest level since September 2012 yesterday afternoon, Bloomberg reported.

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Kiwi borrowers have been enjoying some of the lowest mortgage rates seen in decades thanks, in part, to the favourable wholesale funding costs banks have been enjoying as a result of the low interest rate environment.

But Massey University banking expert David Tripe said the concerns around credit risk were likely to increase the funding costs facing New Zealand banks.

"If it persists for any length of time, we're likely to see some upward adjustment in [consumer] interest rates," Tripe said.

"As funding costs in aggregate for the banks shift, that will shift what banks perceive themselves as needing to charge their customers to maintain their margins."

Still, competition among banks, particularly in the home loan market, remains fierce, which could help shield borrowers from rate increases.

The credit risk fears add to existing investor concerns that have plagued markets this year, including a slump in commodity prices - which has taken oil below US$30 a barrel - and worries about the outlook for the global economy.

The cost of protecting Deutsche Bank's debt against default has more than doubled this year, Bloomberg reported.

- NZ Herald

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