NZ financial system sound, functioning well - RBNZ

21 August 2008 Time

NZ financial system sound, functioning well - RBNZ

The New Zealand financial system is fundamentally sound and continues to function well, despite recent headlines of financial stresses, Reserve Bank Head of Prudential Supervision, Toby Fiennes, said today.

Speaking to an Auckland business audience, Mr Fiennes said investors have been hurt and others unsettled by recent failures of local financial firms, frozen mortgage trust funds, and potential bad debt provisions by international banks.

"I can assure you we are well aware of the cost for people who have been unfortunately caught up in the fallout," he said. "But it is important to keep a sense of perspective.

"The majority of institutions, accounting for over 90 percent of household financial assets, are not directly affected by these current events. These institutions are well capitalised businesses and give no apparent reason for concern."

Mr Fiennes said many of the failures arose from a downturn in the property development sector. The main casualties have been the property lending finance companies, where investors have been exposed to significant risks in exchange for a relatively small margin over bank deposit rates.

The international credit crunch has also meant that funding for financial institutions is harder and more expensive to access, exacerbating the pressures.

"Our banks are navigating their way through the current turmoil well. Capital positions are well above the minimum levels required by regulation. Credit ratings remain strong. And loss provisioning is not abnormal for this point in the cycle.

"We are monitoring the situation closely and are in regular contact with key players, including other regulatory authorities."

Mr Fiennes said that, purely as a precautionary measure, the Bank has put in place a facility where it will accept Residential Mortgage-Backed Securities as collateral for cash, giving institutions an additional funding avenue.

"This facility, like those used by other central banks, has been designed in case the global credit markets deteriorate further and make cash difficult to access, but the likelihood of this being needed remains extremely low," he said.

ENDS

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