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IMF report raises concerns about NZ banks

A new IMF paper on New Zealand’s financial system finds that, given the conservative approach in implementing the Basel II framework, the banks’ headline capital ratios underestimate their capital strength.

Stress tests in the paper by IMF economists  show that four major banks could withstand sizable standalone shocks to their exposure to either residential mortgages (calibrated on the Irish crisis experience) or corporate lending.

However, combined shocks to both residential mortgages and corporate lending would put more pressure on the banks’ capital.

Given high bank concentration and large offshore wholesale funding needs, the paper says the merits of higher minimum capital requirements could be considered along with other measures.

The banks need to be assessed on an ongoing basis to "minimise the risk" they would pose to the economy if they were to fail, the paper says.

"Given their size, they are perceived as too big to fail."

The main concerns are the banks' large exposure to "highly indebted households and the agricultural sector" along with the reliance on offshore borrowing and house prices that look overvalued.

Comments and questions

FIAT currency and fractional reserve banking means that every bank is insolvent... By law we mandate a 4% capital reserve ratio, and that makes it pretty tight really, doesn't it?

All our banks are owned by Ozzie banks and in turn the parent banks (CBA) has large exposure to India and Indonesia markets which could destabilise the whole chain of banks.

Implicit taxpayer guarantee to the rescue. And what is the Reserve Bank doing about this?

I read the report as showing how ridiculously safe our banks are, given the huge shock that would be required to cause distress. I also found it a bit strange they mentioned increasing capital ratios after making the point that banks are already holding capital far in excess of capital requirements.

"Implicit taxpayer guarantee to the rescue. And what is the Reserve Bank doing about this?"

The OBR. The financial system has always had an implicit guarantee in the case of bank runs. One of the purposes of capital ratios and the OBR is to ensure that, given this, risk and return are more closely aligned for banks, while still reducing the chance of a financial crisis.

That was my reading as well. They point out that the reserve caps are in excess of the RB's requirements but below the international average, but that the quality of the capital held is far higher.

Which imaginary four New Zealand-owned banks is the IMF writing papers on?
As Anon said, insolvent, so why all the nonsense/worrying about big (insolvent) banks destabilising smaller/new banks?
Is this a ploy to eliminate any/all competition in the banking cartel.
Should any/all NZ banks stop residential mortgages or corporate lending just because the foreign banks (through the IMF) don't want them to create and gain money for NZ?
The big banking cartel created the bubbles, and yet we (the NZ people) keep bailing these big banks out. The bailouts and their unhampered self-regulation/self-assessments is the only reason (remember 1987) they did/do not "fail".

Anonomouse, what big banks have we, the NZ People, bailed out, other than the govt-owned ones in the 1980s? The only financial institutions bailed out in the GFC were unregulated finance companies, and the money paid by the Australian-owned banks was TO the NZ government, in the form of guarantee fees (not payable by the finance companies).

Not many people realise that since 2010 New Zealand no longer government-guarantees your savings should the banks fail. It would be legal for them to take all your savings or at least "haircut" them a bit. Australia and the UK do have government guarantees for the first 100,000 of your savings, which gives peace of mind. NZ does not.

I think you will find that Kiwibank do still guarantee consumer deposits, albeit they are underwritten by NZ Post and therefore the government. However, you are correct in that from 2010 banks could either opt in or out of the government guarantee scheme. Most, if not all, of the "main" banks then put in place their own internal guarantees for consumer deposits, whether by increasing capital reserves or guranteeing via offshore parents. So, overall, money is still safer in a bank than with the finance companies of old.

Anon, The capital adequacy ratio has never been less than 8% and under the new capital rules is above 10%. No bank in New Zealand is insolvent - all carry capital levels comfortably above the regulatory requirements.

Beyond their standalone solvency, the primary source of strength of the NZ banking system is the fact that it is owned by a stable and well-capitalised group of Australian banks. As for exposure of those banks to growing and relatively 'under-banked' markets being a cause of instability - cup half empty, much?

Be prudent: ensure your debt obligations to the bank outweigh the savings deposited with them.

The IMF's view is based on a supposed similarity to the Irish banks, but they do point out the Reserve Bank's conservative view on what can be considered as Tier 1 capital, and that the banks already hold good-quality capital above the regulatory requirements.

Mmmm...now we have the RBNZ OBR haircut to look forward to!

Matt Nolan's thinking is very odd and his prose tortured, particularly his last sentence.

There is now no guarantee of depositors' funds - Bill English removed these, and Jo is right. If any of the big banks get into trouble they can now help themselves to their depositors' funds.

The Reserve Bank has ensured this through the recent OBR (Open Bank Resolution) so the government can avoid a taxpayer bailout. All very clever.

So much for all the encouragement to NZers towards savings. These banks are very possibly now no safer than the financial companies, and their supporters (investors) could find themselves in the same position as those who tried to "maximise their returns" (a new Right exhortation, after all) by investing in finance companies to help support new businesses and initiative. They were, of course, subsequently vilified as "greedy".

If you think the NZ banks are "no safer than the financial companies" [before the govt guarantee] then you're absolutely crazy. What ratios do you base this on?

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