RBNZ Governor Bollard cautions banks

Intro
Hello. I’m Bernard Hickey with the daily briefing from interest.co.nz…
Today, we’ll look at some concerns the Reserve Bank has about the way banks are funding their lending and we’ll check out what the ultimate CEO of our largest banking group, ANZ National, thinks about the global credit crunch.
Story 1,
But firstly, we look a bit more closely at what Reserve Bank governor Alan Bollard said in Paris on Friday night about how our banks fund their lending.
Essentially he gave them a little bit of a warning that they’re borrowing short and lending long, which meant they were a little bit vulnerable if suddenly global investors stopped lending to New Zealand.
Borrowing short and lending long is generally a bad idea. It means that if suddenly depositors wanted their money back in a hurry then banks would have to liquidate their loans.
Generally banks and finance companies try to match the maturities of their lending and borrowing.
Currently the banks are taking in a lot of short term deposits from investors worried about finance companies and other investments. They’re generally for 6 to 12 month terms. They’re also borrowing at shorter terms on wholesale money markets.
Then on the other side the banks lend to homebuyers for 20 or 25 year terms. The banks rely on the fact that many people pay back their mortgage early when they sell a house or move to another mortgage provider. These mortgages actually have a real term closer to 18 months to 2 years.

The Reserve Bank isn’t warning about any failures but is just sending out a gentle caution.
Story 2
Now for a quick look at what the new CEO of the ANZ National group in Australia, Mike Smith, is saying about the credit crunch and the likely fallout in this part of the world.
What he says is important because he controls the bank which collectively has over a third of all New Zealand’s bank deposits and lending.
He’s not pulling any punches.
He said in an interview with the business spectator website that he sees global losses from the sub-prime credit crunch approaching US trillion and that it won’t calm down until June next year.
He says Australia’s banks, which also means New Zealand’s banks, have relatively little exposure to this crisis and doesn’t see any big bank failures either in Australasia or the rest of the world.
But he does see the cost of wholesale funding rising, which will have to be passed on to customers.
He also hinted that banks may have to raise extra capital to cope with all the corporate lending that will come back to the banks from the wholesale markets.
ANZ National is already doing that in New Zealand through its perpetual note issue on the NZX to raise up to 0 million in tier two capital.

I’m Bernard Hickey from interest.co.nz with the Daily Briefing. Catch you on Tuesday.