KEY POINTS:
What is Reserve Bank Governor Alan Bollard up to? As revealed by the Business Herald last week, his discussions with major bank chief executives look likely to have driven increases in fixed-term mortgage rates.
If that is the case, then aside from any impact on the housing market
he was hoping for, Bollard has effectively ordered the banks to make bigger profits.
The word - from several sources - is that Bollard threatened to slap banks with more onerous capital adequacy requirements unless they increased their margins on fixed-term mortgages.
The Reserve Bank has refused to give details of Bollard's discussions and requests to the banks for information generated typically bland, perfunctory and uninformative responses.
ASB Bank chief executive Hugh Burrett, the only major bank chief executive to comment last week, said the meetings had an "indirect" effect on recent rate increases, but Bollard, "certainly hasn't instructed us to get our margins back".
More recently, Bank of New Zealand chief executive Cameron Clyne downplayed the meetings as no more than "routine discussions".
However, that's not exactly the impression Bollard gave Parliament's finance and expenditure committee just over a month ago.
Then, while talking about measures to supplement the official cash rate's now less-than-perfect control over housing market inflation, Bollard said he was arranging meetings with bank chief executives "with some degree of urgency" to discuss their mortgage lending.
On the agenda, he told the committee, was the slenderness of their margins, and the prospect of changes to the capital adequacy regime, intended to limit their mortgage lending.
A few weeks later, as those meetings were held, bingo! The banks' fixed-term lending rates moved upwards with an even greater degree of uniformity than usual.
What's more, the increases were greater than movements on wholesale money markets, which banks used as explaining the increases.
It remains to be seen what sort of an effect the increases will have on demand for new loans and on the spending habits of those households forced to refinance at higher rates. Most homebuyers or their mortgage brokers are able to negotiate rates substantially lower than those advertised.
Nevertheless, it looks like good news for the banks themselves.
For the past two or three years the home mortgage game has been something of a volume business, with banks sacrificing margin to either increase or maintain share of a rapidly growing market. According to one estimate margins contracted from about 110-120 down to 60 basis points.
That has seen the profitability of loans fall, with some bankers warning such slim margins were unsustainable.
Nevertheless it's a game the banks have been forced to play. Westpac chose not to participate in the early rounds of price competition, which proved to be a costly mistake as its market share took a hit.
ASB's Burrett told the Business Herald last week his bank was already moving to rebuild margins before Bollard came calling.
But as far as Bollard "heavying" banks to increase margins as some have claimed, who is going to complain about your regulator telling you to increase the profitability of your main line of business? Especially when you know your rivals are being told the same thing and are therefore not going to undercut you on price.
Fixed-term mortgages now make up about 85 per cent of New Zealand's $132 billion in outstanding home loans by registered banks.
The Reserve Bank estimates about a third of those loans are up for renegotiation this year.
Estimates of the increase in banks' margins on fixed-term loans range from 30 to 50 basis points.
On around $35 billion worth of loans that's $105 to $175 million more going straight to banks' bottom lines.
The perception that Bollard has helped the major banks to higher profits has some of their smaller rivals crying foul.
This week in an open letter to the Reserve Bank, Credit Union Auckland general manager Rob Collins accused Bollard of encouraging price-fixing by urging the big banks to collectively increase lending rates.
"We think there are some wider implications to this whole issue and that's whether the Governor has acted legally in what he's been doing with these reported meetings," Collins said yesterday.
He said the Association of Credit Unions was considering taking the matter to the Commerce Commission competition watchdog. Ironically Bollard was formerly chairman of the commission.
"If it was the chief executive of one of the major banks going around to rivals and saying 'We think our margins are too skinny on fixed-rate mortgages, let's put them up', they'd get prosecuted quite correctly for collusion.
"We don't seen any difference between that and what Dr Bollard's doing."
Feeling the weight
While the kiwi dollar is now within a cent of its post-float high against the US dollar, beleaguered exporters can find some comfort in the fact that it is still a few cents off its trade weighted index highs.
The trade weighted index, or TWI, measures the kiwi against the currencies of our major trading partners which are, according to importance, the US dollar, the euro, the Japanese yen, the aussie and sterling.
Yesterday the TWI closed at 71.20, its previous high was 74.39 in December 2005.
Against the greenback the kiwi closed at US73.45c, against its post-float high of US74.57c in March 2005 and it continues to hit fresh 10-year highs against the yen, yesterday closing at 87.3.
But other than those two, the kiwi is trading well short of its highs against the remaining TWI currencies.
The reason is that the aussie, euro and sterling are riding high against the greenback, much as the kiwi dollar is and largely because of weakness in the US unit.
Although Reserve Bank Governor Alan Bollard gets criticism for laying waste to the export sector by lifting interest rates and making the New Zealand dollar attractive to foreign investors, it's worth noting that the currency is to a large extent driven by factors outside his control.
