What impact will the fallout from the global credit crisis have on you? If you want to borrow, will the bank be willing to lend? And if you are looking to invest – how safe are the banks? Or should you just stash your cash under the mattress where you can keep an eye on it?
Thank your lucky stars that we New Zealanders have inherently boring banks that lack the scale to get themselves into too much trouble. We’re big borrowers, so our small-scale banking has saved us from more serious problems during the global credit crunch.
In my mind, the biggest risk is that the New Zealand banks are owned by Australian parents. It’s those Aussie parent companies which have the scale to make bigger, riskier (possibly dumber) decisions – National Australia Bank and ANZ have made some bad calls recently.
That said, we don’t need to worry ourselves about Australia. The Reserve Bank has done a great job forcing the banks to keep their New Zealand operations standalone.
Although banks have lent out over $140 billion on residential property, it is relatively low risk. Only a small proportion of lending is over 80% of a property’s value, compared the United States where the widespread availability of ‘sub-prime’ loans has contributed enormously to the global financial crisis. Luckily New Zealand was very late to the “low-doc mortgage” party which is at the centre of hangover in the US. (Low-doc mortages are mortgages where you simply have to declare your assets, debts and income. We affectionately call them liar’s doc.)
To put mortgage risk into perspective, banks lose on average 0.07%. Even a threefold increase in this equates to less than 20% of the annual revenue they receive from mortgages.
Why are Mortgage Funds Being Frozen?
The problem with mortgage funds is a basic principle that banks understand, but has escaped most investment managers: you cannot fund long-term assets (mortgages) with short-term funds (deposits.) This has been the undoing of most of the recent finance company collapses and now the mortgage funds – both of which are unregulated by the Reserve Bank!
With mortgage funds these are mostly low-risk. The issue is simply that the funds cannot cash up the mortgages fast enough to keep pace with depositors withdrawing their money. Freezing the funds is absolutely the right thing to do to protect mum and dad investors.
That said, some of the funds are horrendously poor performers. Mum and dad investors have been let down by a lack of significant retail competition, in part driven by the dominance of the major banks. (This will be a theme for another month!)
The ability to get funding remains the single biggest risk for retail banking. However, negating this, the Reserve Bank has put in place processes to give banks access to mortgage funding, and over the past three to four months, retail deposit growth has been twice as much lending growth. In other words, the risk is being well-managed.
The biggest risk for banks is traditionally business lending. Historically, the risk has come from an over-exposure to an industry, like property. This time around finance companies have taken the hit and banks are reasonably well insulated. The risks are likely to sit with the retail and building sectors, which will also have some fallout into commercial property. Despite this, we would struggle to see this threatening bank stability – the more likely result is simply a few years of lower profits!
