Bollard's 'jaw-jaw' puts acid on the banks

“Federated Farmers endorses the Reserve Bank of New Zealand’s (RBNZ) view that the recent strength of long-term wholesale interest rates is unwarranted and pressure on our productive sector is unwelcome,” says Philip York, Federated Farmers economic spokesperson.

“RBNZ governor Dr Alan Bollard’s uncompromising statement makes it abundantly clear that the recent rise of long term interest rates is doing the economy a massive disservice.

“Dr Bollard has delivered a virtuous double punch nailing both the dollar by a cent and dropping interest rates,” Mr York added.

The Federation contends that the banks’ recent hiking of interest rates has built already fat margins and by encouraging borrowers into fixed rate loans, are locking in high interest rates. With many farm businesses struggling in the face of the global recession and rising import prices, this trend is a major concern to Federated Farmers.

“Anecdotal evidence suggests that farmers are being told by bank staff that interest rates are increasing due to the government guarantee,” Mr York continued.

“This is adding some confusion to negotiations with farmers when refinancing or establishing new facilities. Federated Farmers urges the banks to be clear on the real nature and cost of the guarantees with clients.

“There are actually two guarantees. For our main trading banks, the cost of the guarantee may not be as great as some think or are being led to believe.

“Don’t get us wrong, banks are very important to the economy and we know bad debt provisioning has to be made. We need banks to play their part by recognising that the risk of a farm business failing is among the lowest of any sector they lend to.

“What the Federation demands is for the banks to be crystal clear with their clients about what the guarantees actually cost. Reducing interest rates as low as possible would be helpful to not only farmers, but the nation as a whole,” Mr York concluded.

THE GUARANTEES

Deposit guarantee (for depositors in approved New Zealand financial institutions): This guarantees that people will get their money back from the bank or financial institution if it gets into trouble. Depending on whether the organisation seeking the guarantee is a bank or not, and its credit rating, the charge for this varies - starting at 10 basis points. Details: http://www.rbnz.govt.nz/news/2008/3462912.html

Wholesale guarantee (guarantees overseas banks who lend money to approved New Zealand financial institutions): Money lent out in mortgages or overdrafts to New Zealanders. This is done on a case by case basis. To date, the Federation understands that only one bank has actually utilised this guarantee for about NZD $180 million. The cost of this guarantee again depends on the organisation and its credit rating - starting at 70 basis points. Details: http://www.treasury.govt.nz/economy/guarantee/wholesale/operationalguidelines

While trading banks have increasingly relied more on money from overseas, much of their funding has been sourced through the Reserve Banks recently-introduced “liquidity measures.” Details: http://www.rbnz.govt.nz/news/2008/3310253.html. This allows banks to borrow from the Reserve Bank using some of their mortgages as security. Banks have raised $6.5 billion under the term auction facility.