Banks have tapped into the Reserve Bank's Funding for Lending Programme to the tune of more than $8 billion to date

New Zealand residential mortgage lending banks have so far tapped into $8.231 billion of public money via the Reserve Bank's Funding for Lending Programme (FLP).

The FLP was launched by the Reserve Bank (RBNZ) in December 2020 to provide additional monetary stimulus to the economy to help the RBNZ meet its consumer price inflation and employment remits by reducing banks’ funding costs and lowering their borrowers' interest rates.

To date ANZ NZ has borrowed $1.5 billion through the FLP,  ASB $2.5 billion, BNZ $1 billion, Westpac NZ at least $2 billion, Kiwibank $1 billion, SBS Bank $100 million, and the Co-operative Bank $80 million. Whilst some banks are happy to disclose how much they've borrowed through the FLP when asked, others aren't. In the latter cases we have to go on what's detailed in their most recent disclosure statements.

The three-year FLP funding is available to banks over a two-year period running until December 6 this year. The FLP allows eligible banks to borrow directly from the RBNZ at the Official Cash Rate (OCR) with the borrowing rate adjusting over the term of the transaction if the OCR changes. The OCR was 0.25% when the FLP launched and is 1% now.

When launching the FLP the RBNZ said it would make banks less reliant on more expensive deposits and wholesale borrowing, thus lowering their overall funding costs. Banks could then pass these reductions on to their borrower customers through lower mortgage and business lending rates.

However, by the time it launched the FLP was arguably already a solution looking for a problem, with the most dire economic predictions in the early days of the Covid-19 pandemic not coming to fruition. Earlier government and RBNZ support measures including the Wage Subsidy, OCR reduction to just 0.25% and RBNZ quantitative easing, or government bond buying programme, were already stimulating economic activity. Asset prices were surging with Real Estate Institute of New Zealand data showing national median house prices up 18.5% year-on-year to a new record median high of $749,000 in November 2020.

At the same time the RBNZ was preparing to launch the FLP, it was also talking about potentially taking the OCR negative, something that ultimately didn't happen.

Not saver friendly

The FLP hasn't been good for savers and it's not designed to be given the aim of reducing banks’ funding costs including the deposit rates they pay savers. In its Monetary Policy Statement last week the RBNZ noted; "Term deposit interest rates fell to historical lows in 2020, in part due to monetary policy actions including the Funding for Lending Programme."

It also said; "Short-term bank funding remains very cheap, as evidenced by the three-month BKBM-OIS spread, which captures the difference between the Bank Bill Benchmark rate [BKBM] and the OIS [overnight indexed swap] rate. Longer-term bank funding costs have increased slightly but remain close to, or below, their 2019 levels. This implies that wholesale funding is still relatively cheap for banks. Recent volatility in overseas markets has not yet had a material impact on New Zealand banks’ ability to source wholesale funding."

At the time of launch the RBNZ said the effectiveness of the FLP would depend on banks passing on declines in their funding costs to borrowers, and it would monitor pass-through to lending rates closely. The success of the programme would be measured by the fall in household and business borrowing rates, rather than the level of drawdown.

With inflation having hit 5.9% in the latest Consumer Price Index figures, and the RBNZ having hiked the OCR at three consecutive reviews, we've been in a rising interest rate environment for some months now. The average bank two-year mortgage rate, for example, was at 2.53% in July last year and is now at 4.2%.

How it works

FLP funding is structured as floating rate repurchase transactions priced at the OCR for a term of three years. Bank participants can access the funding at the equivalent of up to 6% of their total outstanding loans. For ANZ based on its gross loans of $141.341 billion at September 30 last year, for example, it could potentially tap the FLP for up to $8.48 billion.

Eligible securities banks can pledge as collateral for FLP money include Residential Mortgage Backed Securities, New Zealand Government Securities, and Kauri debt issues.

In 2020 building societies and credit unions expressed disappointment at being excluded from being able to access the FLP, with the RBNZ noting they didn't have the assets to use as collateral for FLP access, and that the costs of establishing the required infrastructure would be prohibitive.

And last year Heartland Bank CEO Chris Flood told interest.co.nz the nature of assets required for use as collateral to participate in the FLP didn't match Heartland's lending book well enough to enable it to participate.

"We had some discussions with the Reserve Bank about broadening the asset criteria. [But] they made a call not to do that, and so at this point it's not something Heartland's considering," Flood said last year.

"We thought motor vehicle assets might have been something that they could've looked at," Flood said, adding the Reserve Bank chose not to do so.

"If we had a bigger mortgage book I think that would've made it easier to participate."

Use as they choose

Banks, making record profits, are free to use FLP money as they choose. For example, they could on-lend it to property investors adding fuel to the housing market, or use it to pay down more expensive existing funding.

ASB says it's using FLP money "for the benefit of all New Zealanders" via "purpose-led loans." This includes its Back My Build loans to borrowers wanting to build new homes, lending to businesses investing in infrastructure and sustainability projects, and rural sustainability lending for farmers making environmental upgrades. 

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