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NZ Banker's Assoc. Summit Paper: NZ Banking System

Summary And Overview: NZ Bankers’ Association Discussion Paper:
New Zealand’s Banking System
Key Points
• A strong, well performing financial system is the lifeblood of a modern economy.

• The role of a bank is to remain strong and viable giving investors – both here and offshore - the confidence to keep lending therefore maintaining the flow of capital for the business sector and consumers wishing to borrow.

• The New Zealand and Australian banks are in a strong financial position: credit quality has not deteriorated, and taxpayer funded support or bailouts of any sort have not been required nor are they anticipated.

• Today only 11 banking groups in the world are rated AA by Standard & Poor’s. Four of those eleven are operating in New Zealand.

• New Zealand is critically dependent on capital in a world where investors are spoiled for choice. This is a time for good old fashioned banking that the sector is well positioned to provide.

• The New Zealand banks are lending – Reserve Bank of New Zealand statistics show that credit growth continues, albeit at a slower rate.

• Credit is not being rationed but New Zealand banks are making careful lending decisions. It is in everyone’s best interests that debt levels are sustainable and that businesses that access lending do so having demonstrated their viability.

• New Zealand banks that are subsidiaries of Australian banks are required to run their businesses entirely separately from their parents. Their business is in New Zealand and their customers are New Zealanders who also benefit from the strength, scale and diversity of the large parent banks.

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• Banks are working actively and diligently with customers through the most severe recession since the early 1990s, and there are lots of things we can (and are doing) to help customers get through this stage of the cycle.

• There are also things that banks can’t do: we can’t support all customers who get into financial difficulties, and we can’t “pick winners” on an industry or sector basis.

• New Zealanders can have confidence in their strong –albeit vanilla - banking system and banks’ ability to continue to mobilise foreign and domestic capital to underpin consumption, investment, jobs, wealth creation.

• Banks are among New Zealand’s largest employers – contributing $1.6 bn in corporate tax in 2007, and employing over 26,500 New Zealanders. The ability for banks to operate profitably enables the sector to contribute positively to the economy and society in general.

What can be done to address the current issues faced by New Zealand businesses?
• Businesses and households need to manage their own cashflows prudently and in the context of the current slowdown in the economy.

• Businesses and individuals should approach their bank quickly if issues are arising, and be prepared to provide as much information as possible – probably more than they would perhaps be used to. The sooner banks know there’s a problem, and the more information banks have, the more they can do to help.

• Policy responses need to be targeted at medium-term issues;
• improving domestic savings
• 1 driving productivity growth
2 improving financial literacy

Banks need to have concrete plans that lock in forward funding requirements well into 2010, thus reducing the risk that further destabilisation in the major international markets could impact sharply on New Zealand. The Reserve Bank has been assisting with this.

Further enhancements
The New Zealand Banker’s Association has outlined a number of recommendations to the New Zealand Government that could be implemented to assist banks in the current environment and would, in turn, flow through to the borrowing costs facing New Zealand businesses and individuals.
These are detailed in the Discussion Paper.

Maintaining New Zealand’s sovereign rating
However the most important challenge facing the New Zealand Government – and New Zealand banks – is maintaining New Zealand’s sovereign rating. This credit rating underpins access to, and the cost of, offshore funding for the economy as a whole.
A downgrade to the foreign currency rating could lead to rating downgrades for New Zelaand banks and other corporates. This would not only put further pressure on banks’ abilities to raise funds offshore, but it could see more firms turn to banks for funding if they are shut out of the capital markets.

The best way for banks to support employment in New Zealand is by remaining strong and viable themselves.
• This ensures the mobilisation of both domestic and foreign capital so that it’s available for consumption and investment – and thus jobs.

• The US is the best example of what happens when banks become unprofitable and struggle to remain solvent.

• Since the start of the recession in the US, over 3.5 million jobs have been lost, and the unemployment rate has increased from 4.9% at the start of 2008 to 7.6% now.


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