Bank books changing shape

Rob Hosking

Wednesday 11th May 2011 1 Comment

Banks are beginning to ease their lending conditions, but market and regulatory changes should see increases in deposit rates over coming months, says the Reserve Bank

The central bank’s latest financial stability report, released this morning, says the position of the country’s main banks continues to improve.

However, weak credit demand has made it relatively easy for banks put their books on a more stable footing, as banks have not had to raise large amounts of core funding to fund balance sheet growth.

That will change as the recovery gathers steam later this year.

The banks also face tighter Reserve Bank funding requirements. The Reserve Bank’s core funding requirement is at present a minimum of 65%, rising to 70% in July and 75% by June next year.

Most banks are already well above the 65% level, and some even above the 70%, but the 75% will be harder as lending increases.

“We expect bank bond issuance to pick up gradually as existing debt expires in the latter halve of 2011. However banks need to be conscious that the minimum core funding ratio is scheduled to rise to 75% in 2012. The major New Zealand banks have only recently started to issue significant amounts of debt in term markets and it may take time to expand the investor base.”

The funding costs for banks have also increased, due to the higher prudential requirements, and pressure from ratings agencies.

“Retail spreads are now similar to the spreads on long term wholesale funding, which are much higher than prior to the global financial crisis…. as both fund sources are part of core funding retail funding spreads are likely to remain correlated with wholesale funding spreads in the future.”

Banks now, as a group, are relying less on short term funding: 45% of funding was previously longer than 90days, whereas the proportion now is around 65%.

Banks have also increased their holdings of liquid assets.

Comments from our readers

On 11 May 2011 at 2:18 pm George W Hunt said:

IA read in the Federal Bylaws that member banks would receive a 6 percent statuary dividend for certain excesse balances in their reserves. If this is so, the banaks are earning 6% on their treasuries plus any interest. Wow! Why lend?