Banks Should be Clear on Govt. Guarantees costs

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WEBSITE WWW.FEDFARM.ORG.NZ

24 February 2009
Banks Should be Clear on Government Guarantees costs say Federated Farmers.

Banks need to be clear about which guarantee they are talking about and what it costs when they say it is a reason for higher interest rates than otherwise, Conor English, CEO of Federated Farmers said tonight.

This follows an interview on tonight’s TV One Close Up program when a senior bank economist gave the government guarantee as a reason for higher interest rates than otherwise would be the case.

“Banks should be clear – there are two guarantees, and for our main banks the costs may not be as great as some may think.

“The first is the “deposit guarantee” for depositors into New Zealand banks. It guarantees that people will get their money back from the bank if the bank gets into trouble. Depending on weather the organisation seeking the guarantee is a bank or not and its credit rating the charge for this varies, staring at 10 basis points. (details http://www.rbnz.govt.nz/finstab/3463154.html)

“The second guarantee is called the “wholesale guarantee”. This guarantees overseas banks who lend money to New Zealand based banks who then lend this money out in mortgages or overdrafts to New Zealanders. This is done on a case by case basis. To date we understand that only one bank has actually utilised this guarantee for about NZD $180 million. The cost of this guarantee again depends on the organisation and its credit rating and starts at 85 basis points.
Details http://www.treasury.govt.nz/economy/guarantee/ wholesale/operationalguidelines

“Banks do need to get funding on an ongoing basis. Increasingly as they have built their book they have relied more on money from overseas. However currently they seem to be sourcing much of their funding through the Reserve Banks recently introduced “liquidity measures”. This allows banks to borrow from the Reserve Bank using some of their mortgages as security. They appear to have been using this quite significantly with $6.55 billion raised under the term auction facility.

“Banks are very important to the economy. We know its isn’t going to be plain sailing getting through the current climate for anyone, but we need banks to play their part. Being clear on what the two guarantees actually cost would be helpful to all parties,” Mr English concluded.

ENDS

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