Curtain falling on Reserve Bank's Funding for Lending Programme which has continued providing economic stimulus as the OCR has been hiked 400 basis points

The curtain falls on the Reserve Bank's controversial Funding for Lending (FLP) Programme today (Tuesday), with banks having borrowed $19.021 billion through it.

The FLP was introduced in December 2020 with the aim of lowering interest rates and encouraging households and businesses to spend and invest.

Offering three-year loans, the FLP allows eligible banks to borrow directly from the Reserve Bank 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 4.25% now.

As of Friday, December 2, banks had borrowed $19.021 billion via the FLP.

A funding source for mortgage lending banks

Eligible banks have been free to use FLP money as they choose, with up to $28 billion initially available to them. Banks' initial potential allocation was 4% of their eligible loans as of 31 October 2020, able to be drawn down between 7 December 2020 and 6 June 2022.  An additional allocation may be drawn down by December 6 equal to 50 cents for every dollar of net growth in eligible loans from 1 November 2020 up to a maximum of 2% of eligible loans as at 31 October 2020. 

In August Reserve Bank (RBNZ) Assistant Governor Karen Silk told interest.co.nz about another $8.5 billion was available to banks by the December 6 deadline, meaning around $21 billion could be borrowed via the FLP in total.

The way the FLP was designed means it was set up for residential mortgage lending banks, as highlighted by Heartland Bank CEO Chris Flood last year.  Flood said Heartland had talked to the Reserve Bank about using motor vehicle assets as collateral but the central bank opted against this. Heartland hasn't borrowed through the FLP. Meanwhile, building societies and credit unions were disappointed to be excluded from the FLP.

FLP funding is structured as floating rate repurchase transactions priced at the OCR. Eligible securities banks can pledge as collateral for FLP money include Residential Mortgage Backed Securities, New Zealand Government Securities, and Kauri debt issues.

What individual banks have borrowed

So which banks have tapped into the FLP and how much has each borrowed? The figures, as of Monday, are detailed below.

A spokeswoman for ANZ NZ, the country's biggest bank, says it has borrowed $3.5 billion through the FLP, which is less than the total amount available to ANZ.

"The Funding for Lending Programme has been an effective tool for providing monetary stimulus. ANZ NZ has offered significant discounts across a range of products this year; we have now lent more than $4 billion under our Blueprint to Build initiative and seen good demand for our Good Energy Home Loan that was launched in July with a fixed rate for three years of 1.00%.  We’ve lent far more under these products than the $3.5 billion we have borrowed under the Funding for Lending Programme," the ANZ NZ spokeswoman says.

An ASB spokeswoman says the bank has borrowed $5 billion out of a total available allocation of $5.7 billion. In August ASB CEO Vittoria Shorrt told interest.co.nz ASB would use the full $5.7 billion and maintained the bank wasn't making money from the lending it's doing with FLP funding.  

In May 2021 ASB launched its Back My Build home loan offer, lending to borrowers building houses at a floating interest rate of 1.79%, which it said would be funded with FLP money. The Back My Build interest rate's now 5.54%. In June 2021 ANZ NZ followed with Blueprint to Build with a 1.68% rate for new builds. It's now at 5.23%.

"Our lending products linked to FLP have been enormously successful and helped our customers build homes, support sustainable transition and begin key infrastructure projects. Overall lending growth expectations have been lower than previously anticipated. ASB has remained committed to only drawing FLP for supporting these initiatives, and passing on the benefit to our customers," the ASB spokeswoman says.

A BNZ spokeswoman says the bank has accessed $3.449 billion of the $5.097 billion in FLP funding available.

"It allowed us to pass the benefits of lower interest rates on to New Zealanders through initiatives like our BNZ Good To Grow programme, Green business loans and green home loan top-up, to support New Zealanders’ ambitions to improve sustainability, productivity and growth, whether at home or in their businesses," the BNZ spokeswoman says.

A Westpac NZ spokesman says the bank doesn’t comment on FLP drawdowns. However, its latest general disclosure statement says Westpac NZ had drawn down $3.871 billion through the FLP as of September 30.

Kiwibank has used its full allocation of $1.385 billion for general funding, a Kiwibank spokeswoman says.

"The benefit of lower cost funds was passed through to both new and existing Kiwibank customers in the form of lower lending rates which helped to boost confidence during uncertain times."

A spokeswoman for The Co-operative Bank says it has utilised its full FLP allocation of $155 million, which has supported home lending, especially to first home buyers.

An SBS Bank spokeswoman says SBS has borrowed its total allocation of $246 million through the FLP, using this "to provide additional support to first home buyers." SBS has pledged $316 million worth of residential mortgage-backed securities (RMBS), debt-based securities similar to bonds backed by the interest paid on loans, as collateral.

A TSB spokeswoman says TSB hasn't accessed the FLP.

"TSB cannot economically access the FLP as TSB doesn’t have internal securitisation. The way the FLP is structured as a secured transaction would increase TSB’s cash position but decrease our unencumbered liquid assets, so from a balance sheet perspective the effect on our funds would be neutral," the TSB spokeswoman says.

FLP 'still providing some stimulus'

The FLP is a stimulatory monetary policy tool that has remained in use while the Reserve Bank has been increasing the OCR by 400 basis points. Speaking in a recent episode of interest.co.nz's Of Interest podcast, Silk noted the FLP funding has been cheaper for banks than alternatives, but said its scale in the context of all bank borrowing is small. 

"The Funding for Lending Programme provides funding to banks at the Official Cash Rate. So as the OCR is increasing so does the cost to the banks. Compared to the wholesale markets it is comparatively cheaper, but it represents less than 2% of total bank funding. So it's at a very marginal level still providing some stimulus and hold rates back a little bit. We take that into account when we're setting the OCR levels. Our estimate is that it is adding roughly five basis points to the OCR track," Silk said.

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 February Monetary Policy Statement the Reserve Bank noted; "Term deposit interest rates fell to historical lows in 2020, in part due to monetary policy actions including the Funding for Lending Programme."

When launching the FLP the Reserve Bank 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 Reserve Bank support measures including the Wage Subsidy, OCR reduction to just 0.25% and Reserve Bank 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.

In July a Reserve Bank spokesman told interest.co.nz the FLP has worked broadly as intended and as expected.

"We can best observe this by considering the spread between household/business lending rates and wholesale interest rates, i.e. swap rates. Household and business lending rates have been increasing recently, consistent with the tightening of monetary policy, however the spread between these rates and wholesale interest rates is still low, relative to most of the post-Global Financial Crisis period. This is partially, but not entirely, due to FLP. Ample domestic and global liquidity, as a consequence of monetary and fiscal stimulus measures in New Zealand and abroad has also provided a mostly accommodative funding environment for banks, and other users of capital markets, in the past 18 months," the Reserve Bank spokesman said.

In one of its Bulletin articles in August 2021, the RBNZ said one and two-year mortgage rates dropped between when the FLP was signalled and early 2021, despite swap rates rising substantially, which normally would increase banks’ funding costs, over the corresponding period.

"This development suggests the FLP has been effective at holding down banks’ funding costs. An important feature of the FLP is that it was effective at reducing bank funding costs and retail rates even before banks drew down on FLP funding. This is due to the relative strength of the FLP’s indirect influence on bank funding costs. The indirect influence reduced funding costs for all deposit takers, not just the banks eligible to drawdown on the FLP," the RBNZ said last August.

FLP 'could've been more flexible'

In the RBNZ's own five-year review of its monetary policy released last month, it acknowledged the FLP could have been more flexible.

"Recognising the importance of being credible and consistent, the [RBNZ Monetary Policy] Committee kept the FLP in place as a source of funding for commercial banks until December 2022, as originally specified," the RBNZ says.

"However, because economic activity improved faster than anticipated, in hindsight, the FLP could have been designed with more flexibility."

"For example, the inclusion of an early termination clause with reasonable notice in the event of changed economic conditions could have been included, although such an amendment could potentially reduce the effectiveness of the FLP."