The aim of the programme was to give banks a relatively cheap source of funding so they could keep mortgage and term deposit rates low to support the economy at a time of crisis.
The deal was that banks pay the Reserve Bank interest at the OCR for the loans that have three-year terms.
While the OCR is rising, the FLP has still been deemed a relatively cheap source of funding.
As at December 2, banks had borrowed $19 billion via the scheme.
The Reserve Bank had offered to lend them up to $28b altogether, provided individual banks’ drawdowns weren’t worth more than 6 per cent of the value of their eligible loan books.
The Reserve Bank, in a five-yearly internal review of its monetary policymaking, last month explained, “The reasons banks did not fully utilise the allocation include that some did not have sufficient eligible collateral to pledge in return for the funding, or that they preferred not to use the collateral for this purpose.
“Some banks may have chosen to continue to source funding from their traditional sources to ensure that these remained open to them on an ongoing basis, noting that FLP is only a temporary facility.”
The Herald asked the major banks how much they drew down from the programme. ANZ said $3.5b, ASB $5b, BNZ $3.4b, and Kiwibank nearly $1.4b. Westpac has a policy not to disclose these details.
Kiwibank drew down the full amount it was able to access.
In its review, the Reserve Bank conceded that in hindsight, it should’ve given itself the ability to end the FLP early. Indeed, in mid-2021, it stopped creating money to buy government bonds via its Large-Scale Asset Purchase programme.
The Reserve Bank said the FLP “could have been designed with more flexibility”.
“For example, the inclusion of an early termination clause with reasonable notice in the event of changed economic conditions could have been included, although such an amendment could potentially reduce the effectiveness of the FLP,” the Reserve Bank said.
As for the impact of the FLP, the Reserve Bank concluded, “While pass-through from funding costs to mortgage rates appeared slow, and the transmission channel involves some uncertainty, mortgage rates likely declined by 10 to 20 basis points over time due to the FLP.”
Looking ahead, BNZ senior economist Craig Ebert said it was difficult to put numbers on how the end of the FLP would impact mortgage and term deposit rates.
He said it was a marginal factor among a number of factors that influence banks’ funding costs.
While the cost of money is rising globally, banks are currently well-funded.
As interest rates rise, people are taking their money out of transaction accounts and putting it in term deposits. Demand for debt is also low.
