24 February 2009
Banks Should be Clear on Government Guarantees costs say Federated Farmers.
Banks need to be clear about which guarantee they are talking about and what it costs when they say it is a reason for
higher interest rates than otherwise, Conor English, CEO of Federated Farmers said tonight.
This follows an interview on tonight’s TV One Close Up program when a senior bank economist gave the government
guarantee as a reason for higher interest rates than otherwise would be the case.
“Banks should be clear – there are two guarantees, and for our main banks the costs may not be as great as some may
“The first is the “deposit guarantee” for depositors into New Zealand banks. It guarantees that people will get their
money back from the bank if the bank gets into trouble. Depending on weather the organisation seeking the guarantee is a
bank or not and its credit rating the charge for this varies, staring at 10 basis points. (details http://www.rbnz.govt.nz/finstab/3463154.html
“The second guarantee is called the “wholesale guarantee”. This guarantees overseas banks who lend money to New Zealand
based banks who then lend this money out in mortgages or overdrafts to New Zealanders. This is done on a case by case
basis. To date we understand 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 and starts at 85 basis points.
“Banks do need to get funding on an ongoing basis. Increasingly as they have built their book they have relied more on
money from overseas. However currently they seem to be sourcing much of their funding through the Reserve Banks recently
introduced “liquidity measures”. This allows banks to borrow from the Reserve Bank using some of their mortgages as
security. They appear to have been using this quite significantly with $6.55 billion raised under the term auction
“Banks are very important to the economy. We know its isn’t going to be plain sailing getting through the current
climate for anyone, but we need banks to play their part. Being clear on what the two guarantees actually cost would be
helpful to all parties,” Mr English concluded.