Reserve Bank issues warning over finance companies

Fast-growing finance companies are vulnerable to a more challenging economic climate, Reserve Bank Governor Alan Bollard is warning.

The caution came in the release today of the Reserve Bank's twice-yearly Financial Stability Report which assesses the health of the country's financial system.

A slower growing economy would bring challenges to households and financial institutions -- specially those that had recently experienced rapid growth and had limited experience in managing a downturn, Dr Bollard said.

A summary of today's report said the non-bank financial institutions particularly vulnerable were those with lending portfolios concentrated in property and consumer finance.

"Significantly higher loan losses have recently been reported by some companies which have experienced faster growth, one of which was recently put into receivership," the summary said.

"However, individual and isolated failures are unlikely to pose significant risk to the stability of the financial system."

The report said non-bank financial institutions had assets exceeding $25 billion, about 10 per cent the size of registered banks.

For households, being increasingly ready to buy property as an investment had raised their financial vulnerability to interest rate changes, unemployment and swings in rental incomes and property capital values.

In the year to December household debt grew by 15 per cent to more than $132 billion, primarily reflecting increases in mortgage debt which made up about 90 per cent of all household debt, the report said.

But an initial assessment of household balance sheets found most debt was held by households in higher income groups, who also held most of the assets identified in the survey and spent a smaller proportion of their disposable income on interest payments.

Lower income households, with fewer assets and weaker ability to service debt, did not hold much debt, the report said.

Indebted middle income households were, on balance, more exposed to shocks to interest rates or disposable income.

Despite his concerns, Dr Bollard said the New Zealand financial system was well placed to weather the slowdown in the economy. The banking sector was profitable, well capitalised and able to bear increases in impaired assets as economic conditions became more challenging.

When it comes to coping during a possible protracted period of pandemic influenza, the Reserve Bank had been putting in place procedures to ensure its core operations could be carried out effectively throughout such a period, the report said.

"Those plans are now well advanced and will be tested wherever possible."

The Reserve Bank had also been working closely with the banking industry to help ensure it was as well placed as possible should a pandemic hit.

Banks appeared to have made good progress in developing plans to manage core services during a pandemic. The report said most mortgage borrowers were likely to find lenders relatively supportive during a pandemic period, and many might be able to defer principal repayments and capitalise ongoing interest obligations.

The Reserve Bank was talking to banks about the likely treatment of corporate credit, and banks were likely to be relatively supportive of firms needing additional credit, although the reported noted that in some cases firms would have little likelihood of emerging from a pandemic in sound financial health.

- NZPA