Bollard gives lenders extra time to beef up core funding

Reeserve Bank Governor Alan Bollard. Photo / Mark Mitchell

The Reserve Bank of New Zealand has given local lenders an extra six months to meet an increased target for their core funding ratio as global market turmoil puts the brakes on banks' ability to tap offshore markets for long-term debt.

Banks will have to lift the ratio of locally sourced retail deposits and long-term foreign funding to 75 per cent in 2013 as access to overseas debt markets tightens, the Reserve Bank said in its latest financial stability report.

The ratio was introduced to ensure New Zealand banks weren't relying too much of short-term loans from foreign lenders, which could put them under pressure if the financial system collapsed as it did in the 2008 global financial crisis.

"Given the current market tensions, the Reserve Bank has decided to defer by six months its planned further increase in the core funding ratio, which was to have occurred in July 2012," said deputy governor Grant Spencer. That gives "the banks more latitude in managing their funding programmes."

The decision comes as Europe's sovereign debt crisis escalates, with markets focusing on Italy's ability to repay maturing bonds after Greek policymakers united to form a coalition government in a bid to meet the austerity terms imposed by its bail-out package. Italy's woes have forced the resignation of controversial Prime Minister Silvio Berlusconi, who will step down after passing his own cost-cutting measures next week.

Europe's instability has eroded global confidence in the worldwide economic recovery, and Governor Alan Bollard said that has limited New Zealand lenders' access to foreign markets and increased the level of risk facing the nation. That's led to a decline in New Zealand's own financial stability, with lenders likely to face increased costs when they tap global debt markets in coming months.

Some $15 billion of bank term funding will move to shorter maturities in the coming 12 months and will no longer qualify as core funding, the report said. That means new issuance of long-term debt or retail deposits will be needed to replace that funding, which may push up their costs.

Bollard said the bank has the capacity to provide exceptional liquidity support to the banking system if credit markets collapsed like they did three years ago, though he doesn't expect it to be called on.

Still, New Zealand's system if "arguably better placed to weather global shocks than at the time of the collapse of Lehman Brothers and other subsequent global turbulence over late 2008 and 2009," Bollard said in his report.

New Zealand's banks are well-capitalised and positioned to meet higher requirements to improve their liquidity and capital buffers, the report said. Improving interest rate margins and profitability, as well as a reduction in the level of bad debt has underpinned that position.

Lending growth remains subdued and standards are tighter than before the crisis, the report said.

Bollard said households are still reducing their level of debt, though more needs to be done, and he supported the government's intention to return its books to surplus by 2015.