03 November 2009

More evidence NZ Big Banks had Ample Funding During the Crisis

As I have previously argued in:

Stuart Nash MP - Financial Alarmist (on the Crown Retail Deposit Guarantee Scheme)
Turning On a Dime: Crown Retail Deposit Guarantee Scheme
Old-style firms favoured in guarantee rejig
NZ Banks Among World's Safest
Proof NZ banks didn't need the government guarantee
Credit crunch? What credit crunch?
What financial crisis? NZ banks doing fine without Crown guarantee
David Bennett & National Party from another planet

The NZ big banks, although heavily reliant on offshore wholesale funding, had and still have ample sources of funding and liquidity, even at the height of the financial crisis when offshore commercial paper markets were supposedly closed.

Firstly, it should be noted that NZ big banks were still able to raise funding from wholesale US commercial paper markets during the height of the financial crisis, and this was known by Treasury and RBNZ and stated in advice to policy makers 2 days before the deposit guarantee scheme was introduced. The RBNZ reported in May 2009, that between September 2008 and March 2009, wholesale offshore funding declined by only 50%, in USD terms (less in NZD terms), indicating that the NZ banks continued to make substantial use of these markets (p 31).

Secondly, the NZ big banks had many other options to provide ample funding to replace offshore commercial paper markets, including using residential mortgage assets on their books to create structured finance securities that the RBNZ would accept as collateral for funding, and borrowing from, or selling assets to, their parents.

Today's Business Day article provides further evidence that NZ big banks had, and were using alternative sources of funding -- and of course, why wouldn't they? -- when one source gets more expensive and less available. The source the article provides evidence of is direct funding from their parents. Article is copied below.

Banks Source Cash from Aussie Parents
The four Australian-owned banks in New Zealand are sourcing as much as 10 percent of their wholesale funding directly through their parents in related party funding.
With deposits only providing 40 percent of funding, the banks find 40 percent of their funding from wholesale sources, according to an analysis by Moody's Investors Service.
"Close ties with their Australian parents have allowed the major four New Zealand banks to effectively source around 10 percent of their wholesale funding indirectly through their parents' groups," Moody's said.
Those strong relationships provided an important source of funding when debt markets were not functioning normally during the financial crisis.
The four Australian owned banks are ANZ National Bank, BNZ, Westpac and ASB. They have an AA2 rating with a stable outlook at Moody's.
The Australian parents were more readily able to access wholesale debt funding, particularly long-term debt, due to their extensive wholesale funding programmes.
Moody's said a decision by the Reserve Bank of New Zealand to remove and consolidate some of the temporary emergency liquidity facilities put in place during the financial crisis in 2008 would have a negligible effect on bank ratings.
"To date, use of these facilities has been nominal, when compared to the size of the system's total funding position," said Marina Ip, an Assistance Vice President at Moody's Sydney office.
The changes announced by the RBNZ take effect from the beginning of November.
Moody's said the New Zealand banks have tapped the wholesale funding government guarantee facility more recently and reliance on related party funding should return to long-term average levels.
It expects the Australian parents to continue to be highly supportive of their New Zealand businesses because of shared branding and close operational integration. It sees a relatively low risk that a parent would dispose of a New Zealand subsidiary.
The RBNZ finalised a new liquidity policy on October 20, which co mes into effect on April 1, 2010.
Moody's said the new liquidity policy was conservative with regard to the funding mix and also level and quality of liquid assets held, and compared favourably with similar initiatives outlined by the Australian Prudential Regulation Authority and Financial Services Authority in the UK.

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