Last week Standard & Poor's commented that it may have to downgrade the Co-operative Bank, Heartland Bank, TSB, Credit Union Baywide, Credit Union South, First Credit Union, New Zealand Association of Credit Unions, and Police and Families Credit Union.
This is because these organisations mainly lend money for mortgages on housing, and this market in Auckland and Christchurch is red-hot. It is well known that the Government is concerned about this, as is the Reserve Bank of New Zealand.
If something causes a major downturn in house prices, it could take down one or more of these organisations. But note, S & P's outlook on ANZ, ASB, BNZ, Westpac, Bank of India, Rabobank and Kiwibank is unchanged.
However, Westpac recently pulled back on its level of mortgage lending loan-to-value ratios (LVR) after house prices in Auckland and Christchurch rose to a level Westpac wasn't "comfortable" with, although chief executive Peter Clare said it didn't look like a bubble yet.
Clare said the reduction in Westpac's LVR loans above 80 per cent meant the bank was well positioned to respond to the Reserve Bank's concerns.
Could a society or credit union really fail?
It is impossible to predict the future, so it is impossible to say which might fail. Indeed none may fail. Or could they all fail?
The banks lend 8.4 times equity
PM Capital recently commented on issues about New Zealand's big four banks, which are all owned by Australian parents (incidentally, their profits soared to near $3.5 billion for the 2011/2012 year).
Australian banks hold up to 8.4 times gross loans to equity. The perception of home loans is that they are low risk, but the reality is if we ever had an environment in which home prices were to decline 20 per cent to 30 per cent on a permanent basis, there would be a significant problem. The sizeable amount of leverage on the balance sheet from these loans would cause the big banks serious distress.
PM capital said this highlights that people are forgetting how balance sheets work and assuming home loans will be fine forever, which is exactly what happened in 2008 in the US. We all know how that turned out !
On the plus side
The four pillars policy is an Australian Government policy to maintain the separation of its four largest banks by rejecting any merger or acquisition between them, and also ensures the big four cannot be bought out or taken over.
It has been argued that this gave them and the Australian banking system the strength to withstand the Global Financial Crisis of 2008/2009. However, no one really knows, if it came to the crunch, whether or not they would have let their New Zealand subsidiaries fail while saving their Australian operations.
I've been asked several times this week:
Is my money safe in a New Zealand credit union or a major New Zealand bank? We all know now that "what can't happen" sometimes does.
Banks are places only for short-term money. Banks are only places with short-term money, really - wages, short-term savings to buy a big item or a house and so on. But to err on the safe side, I would not keep any large sums in any one bank. If you must have large sums in the bank, diversify across several of them, just in case.
"I never worry about action, but only inaction," said Winston Churchill.
Anyway, most of us can't afford to leave our money in a bank; we need it to earn more - we need it invested.
Diversification and other key issues
The rules of investment are:
This article was supplied by Alan Clarke, author of Retire Richer - A Practical Guide For Everyone Aged 25 to 85. Clarke also blogs on www.investandretire.co.nz and is an authorised financial adviser whose disclosure statement is available on request and free of charge.