By Gareth Vaughan
The Reserve Bank ought to delay next year's lift in the Core Funding Ratio (CFR), which is designed to limit banks' offshore borrowing, if hiking it as planned threatens to reduce the availability of credit and delay an economic recovery, says Westpac New Zealand CEO George Frazis.
Frazis told interest.co.nz that the central bank's plans to lift the CFR from 65% to 70% this July was "probably prudent." The Reserve Bank then plans to lift the CFR, again, to 75% in July 2012.
The CFR was introduced on April 1 last year. It sets out that banks must secure 65% of their funding from retail deposits and wholesale sources such as bonds with maturities of more than one year. It's designed to reduce New Zealand banks reliance on short-term offshore wholesale funding "or hot money."
"I’d reassess the 75% or the timing of that depending on what’s happening in the economy," Frazis said.
If it was likely to operate as a hand brake on a recovering economy, Frazis said the Reserve Bank should implement next year's increase to the CFR at a later date.
"If it does have an impact on the availability of credit, if the economy’s not recovering as fast as we’d like, then I would slow that down – the rise to 75%," Frazis said.
The latest Reserve Bank credit figures show agricultural lending flat in March year-on-year at NZ$47.5 billion, business lending up just 0.1% at NZ$73 billion and household loans up 1.2% at NZ$183.4 billion.
KPMG's annual Financial Institutions Performance Survey, out this week, revealed the country's big five banks - ANZ, ASB, BNZ, Kiwibank and Westpac - reduced their overseas borrowing by just 1% last year to 34% despite the CFR's introduction.
Frazis said Westpac, whose return on average equity rose 617 basis points from the first half of the 2010 financial year to 14.72% in the six months to March, was "comfortably placed" with its CFR already above 75%. The bank's economists forecast Gross Domestic Product growth of 4.7% next year.
Move from 'caution to confidence' needed after 'over reaction to earthquake'
Meanwhile, Frazis said after 18 months of deleveraging by both households and businesses, New Zealand now needed to move from "caution to confidence." And Westpac was "match fit and ready to help."
"I think there was an over reaction to the tragic events of the Christchurch earthquake," Frazis said. "Basically you saw a drop off in confidence that made sense initially, but when you look at the fundamentals that underpin the New Zealand economy, it doesn't really make sense."
The fundamentals include high soft commodity prices and key trading partners - Australia and China "still going strong." Against that backdrop, a third of Westpac's home loan customers are ahead on payments and businesses had done a "great job" of improving productivity and reducing costs, Frazis said.
"If you look at the balance sheets of both business and personal (people/households), there has been a huge deleveraging over the last 18 months which places them in a really good position for investing for growth. The government has done all the right things in terms of investing for infrastructure."
"My sense is we are seeing early signs of (improving) retail sales and also house prices, and they’re good indicators that now is the time to invest for growth."
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