New Zealand May Need to Guarantee Wholesale Bank Deposits

By Tracy Withers

Oct. 14 (Bloomberg) -- New Zealand is facing calls to guarantee wholesale deposits at banks to ensure local institutions can compete for credit against global rivals getting similar backing.

The government on Oct. 12 said it will guarantee retail deposits by consumers and businesses at New Zealand banks and other institutions. Unlike a plan announced the same day in Australia, there is no guarantee of wholesale deposits from fund managers and financial institutions.

New Zealand banks rely on wholesale deposits for between 30 percent and 50 percent of their funds. Lenders are concerned that the difference between the New Zealand and Australian plans may make it more difficult to raise funds when credit markets reopen, which may hinder the economy's recovery.

``There are different risk profiles around the system and in that environment, wholesale funding providers may go offshore,'' said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. ``It could become more difficult to fund investment in the economy and that would be the king hit.''

The Reserve Bank, which regulates banks, said it is comfortable the plan has been designed for New Zealand circumstances. Last week, it said it will accept residential mortgage-backed securities as collateral from banks to meet short-term funding requirements.

``We have announced various measures which have been in place to ensure our banks can meet their immediate funding needs and we will continue to monitor that situation,'' central bank spokesman Mike Hannah said in an e-mailed response to questions.

``The Reserve Bank has set up a number of arrangements with our banks that mean if they go to the markets and the markets are closed, then our banks can certainly continue,'' Bill English, finance spokesman for the main opposition National Party, told Radio New Zealand.

The National Party leads the governing Labour Party in opinion polls ahead of the Nov. 8 general election.

``The bottom line is whether or not leaving out the international loans to New Zealand banks from the guarantee is going to constrain our banks in providing credit,'' English said.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.