22 Mar 2011

Warning bank proposal may push mortgage rates up

6:10 pm on 22 March 2011

A Government proposal to shore up depositors' confidence in the banks could lead to higher mortgage rates, a banking expert warns.

The Government is considering an Open Bank Resolution which would allow depositors to withdraw some of their money the day after a bank fails.

It would replace the Government's retail deposit guarantee which expires at the end of this year, although none of the major banks are covered by the scheme.

On Tuesday, international ratings agency Moody's warned that allowing depositors to withdraw funds after a banking collapse will increase the odds of a downgrade of the banks.

It says the measure will impose losses on shareholders and creditors in a banking collapse.

Moody's already has the New Zealand banks on review for a possible downgrade due to concerns about their over-reliance on overseas funds.

A Massey University banking lecturer, Claire Matthews, says Moody's warning increases the odds of a downgrade of the banks, which would increase their borrowing costs.

The downgrade would result in higher interest rates for households and businesses.