RBNZ in talks with banks to lower wholesale foreign funding for banks

The Reserve Bank of New Zealand has given some detail in its briefing to the incoming Finance Minister Bill English about its discussions with banks to create new policies to manage their funding and liquidity. "It is expected that this policy, when finalised, will reinforce incentives on the banks to diversify away from short-term wholesale funding and thus reduce their vulnerability to market disruptions over the longer haul," the Reserve Bank said in the briefing. The Reserve Bank has flagged this review before, but the focus on directing banks to reduce short term wholesale funding is clearer in this latest document. It raises some interesting questions about how this could be done and what impact it might have on balance sheet structures, lending activities and funding costs. Table 4.1 of the November Financial Stability Report shows the Reserve Bank estimates New Zealand banks have around NZ$81 billion of non resident wholesale funding, which makes up 27% of total funding. This compares with 15% long term foreign fund, 13% local wholesale funding and 41% local retail funding. What is an appropriate level for wholesale short term funding? Should the difference be made up from retail funding here? How would banks transition to that level? Would they be able to keep growing lending during that transition? What help could the Reserve Bank give during the transition? Is the current TAF enough? Would banks have to offer more to term depositers to lift that retail funding portion? Could this significantly reduce margins or would banks attempt to pass on the likely increase in funding costs to borrowers? Meanwhile, the Reserve Bank gave a few more details on its plans to start accepting Asset Backed Securities (ABS) such as credit card, car loan and other receivables as collateral for lending. "The Bank has announced the potential introduction of a new facility which will make Asset Backed Securities (ABS) eligible as collateral in its domestic liquidity facilities in addition to RMBS (Residential Mortgage Backed Securities). This is intended to further broaden the range of assets and institutions that have access to Reserve Bank liquidity. The proposed terms for this facility have been subject to industry consultation and are currently being finalised," the RBNZ said in the briefing. This raises the prospect of car lending and other non-bank institutions borrowing from the Reserve Bank. * This article was first published on Friday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.