Markets with Madison: The U.S Federal Reserve should stop hiking rates after game changing bank collapses, an American chief economist says, and an analyst reveals if New Zealand banks are any safer. Video / NZ Herald
New Zealand banks are less exposed to the risks of rapidly rising interest rates, such as those that crushed Silicon Valley Bank (SVB), because they typically lend money for shorter terms, buy fewer government bonds, value liquid assets at market price and have tougher regulatory requirements.
That’s according to anassessment of interest rate movement risks by the Reserve Bank of New Zealand, in the wake of regional bank problems in the United States.
It found that our major banks ANZ, ASB, BNZ and Westpac mostly equally offset the size and expiry of their liabilities, such as a one-year fixed mortgage, with equally timed and sized assets, such as a one-year fixed term deposit.
If there was any leftover, mismatched risk, they typically hedged that with derivative products like interest rate swaps, futures and forward contracts.
Our banks also held fewer government bond assets than banks in other developed economies, and the ones they did own were accounted for at market value, not book value.
“As a consequence of banks’ generally prudent risk management, we see little relationships between fluctuations in interest rates and banks’ net interest margins.” The Reserve Bank paper titled Interest rate risk management in the New Zealand banking system read.
New Zealand's major banks largely offset their liabilities with assets of an equal amount and expiry. Photo / RBNZ
If the aforementioned protections failed, the RBNZ also required all banks domiciled here to hold a certain amount of capital in reserve to cover any potential losses.
The root causes of Silicon Valley Bank’s collapse were a mismatching of maturities on assets and liabilities, and the scale of holdings in government bonds, which eroded in value quickly as interest rates rose.
When liquidity issues were highlighted by SVB’s management, spooked customers withdrew US$42 billion worth of deposits in one day - classified as a bank run.
Where New Zealand’s banking system regulation could be seen to be lacking is its absence of a deposit insurance scheme to protect customers’ money.
The U.S Federal Deposit Insurance Corp. which took over Silicon Valley Bank in March, guaranteed a backstop for depositors up to US$250,000.
The FDIC agreed to sell SVB, including all its deposits and loans, to North Carolina-based First-Citizens Bank & Trust Co. in late March.
