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Reserve Bank confident in NZ financial system

Reserve Bank Email Service

Date 19 September 2008
Time 1:00pm

Reserve Bank confident in NZ financial system

The Reserve Bank today reiterated its confidence that the New Zealand banking system remains sound, despite significant further turbulence in the US and global financial markets over the past week.

Reserve Bank Governor Alan Bollard said disruptions in the US markets are reverberating around the world. New Zealand banks are not directly involved, although there are indirect adverse effects on liquidity in New Zealand's financial markets.

"Financial prices have become volatile and, with heightened uncertainty, investors are becoming more risk averse," Dr Bollard said. "While New Zealand will inevitably feel the effects of major financial shocks such as this, New Zealand banks are not involved in the sort of complex financial transactions that have caused significant losses in many of the large global institutions.

"However, as stated in the Bank's May Financial Stability Report, the New Zealand banks have seen a tightening in the availability of funding in global debt markets, on which they are relatively reliant. These pressures are exacrebated by recent events.

"There is no immediate problem, but the Reserve Bank always stands ready to support the liquidity of the New Zealand financial system," he said.

Deputy Governor Grant Spencer said two new measures are being introduced which will assist in alleviating the current liquidity pressures.

First, the Reserve Bank proposes to facilitate the injection of funds into the banking system by accepting bank paper in its daily market operations.

"While bank paper is already eligible for use in our standing facility, it has not been accepted to date in the Bank's open market operations," Mr Spencer said. "This measure should take some pressure off the FX swap market which is the usual channel for injecting Reserve Bank funds.

"It is our intention to offer longer terms than usual in our operations, up to six months, in order to help ease pressure at the short end of the market.

"Second, the Reserve Bank is intending to introduce a new facility which will make certain Asset Backed Securities (ABS) eligible as collateral in its domestic liquidity facilities. 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 will be released separately and will be subject to industry consultation before they are finalised."

In addition, the Bank will soon be releasing a consultation document on a proposed revised policy for banks in regards to the management of their own liquidity and funding. This policy is aimed at ensuring that the banks are less vulnerable to future liquidity shocks and disruptions in global funding markets.

"While these measures will assist in promoting a more stable liquidity situation, the Reserve Bank retains full confidence in the underlying solvency of the New Zealand banking system," Mr Spencer said.


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