Bollard Says New Zealand Banks Can Weather Recession

By [bn:PRSN=1] Tracy Withers []

Nov. 12 (Bloomberg) -- New Zealand's central bank said the nation's banks, facing a global credit freeze, have enough capital to withstand a decline in borrowing and rising loan defaults after the economy fell into a recession.

``Collectively the banks appear well placed to weather a weaker economy,'' Reserve Bank Governor Alan Bollard said in his six-monthly report on the stability of the financial system released in Wellington today. ``They have sufficient capital buffers to withstand the higher loan losses that will inevitably result.''

New Zealand's economy contracted in the first half of the year and global financial market turmoil that erupted in September will prolong the slump, economists say. New Zealand introduced a deposit guarantee plan to make it easier for lenders to attract investors and also broadened the range of assets than banks can use as collateral to access liquidity as credit from overseas becomes harder to access.

``Recent global market conditions have affected the cost and accessibility of offshore funding that our banks rely on heavily,'' Bollard said. ``It will likely be some time before conditions normalize.''

The Reserve Bank is also proposing new rules to guide banks on appropriate levels of liquidity management, including prescribed levels of short-term funding from global money markets.

Bank Profits

The policy ``will require the banks to meet minimum standards on the proportion of their assets funded by retail deposits of long-term wholesale deposits,'' he said.

Bollard said the nation's banks are unlikely to suffer major losses because they remain profitable enough to withstand higher funding costs and deteriorating loan quality. Mortgage defaults aren't expected to increase at the same pace as seen overseas, he said.

Banks have tightened lending standards. Still, loans to the commercial property and agriculture sectors need to be monitored ``with additional care in the current environment,'' he said.

About 90 percent of the nation's bank deposits are with the local units of four Australian banks -- Australia & New Zealand Banking Group Ltd., Westpac Banking Corp., National Australia Bank Ltd. and Commonwealth Bank of Australia.

Consumer Spending

Tightening credit conditions are ``reinforcing'' the slowdown in consumer spending that helped push the economy into a recession, the central bank said.

``Household balance sheets are under evident strain and debt-servicing capacity is being stretched,'' Bollard said. New Zealand ``is facing a period of slow growth.''

Bollard has cut the benchmark interest rate by 1.75 percentage points to 6.5 percent since July to kick-start the economy. He will probably cut borrowing costs by at least a half point next month, according to all 11 economists surveyed by Bloomberg News.

Bollard didn't comment on the outlook for interest rates in today's report.

The slump in the housing market ``will cause some strain for individual households,'' he said. ``But given the labor market is not currently expected to deteriorate as much as in earlier periods of economic weakness, most people will not be forced to sell.''

Strong government surpluses accumulated in the past eight years have ``created headroom for fiscal stimulus to stabilize the economy throughout the downturn,'' Bollard said.

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