10 Nov 2011

Tougher bank measures put off amid global turmoil

8:00 pm on 10 November 2011

The Reserve Bank says it will delay tougher measures to strengthen the financial position of the country's banks, because of the turmoil caused by Europe's debt crisis.

In the latest Financial Stability Report, its twice-yearly review of the financial system, the bank takes a bleak tone.

It says the system remains sound but the country is vulnerable to the risks arising from Europe's deepening debt crisis and slowing global growth.

Deputy governor Grant Spencer says the banking system is better placed to weather those risks, but debt remains high and banks' funding costs are rising.

It's therefore prudent, he says, to delay the lifting of the core funding ratio from 70% to 75% until the start of 2013.

"Given the current market tensions," Mr Spencer says, "we have decided to defer by six months the planned further increase in the core funding ratio which was to have occurred mid next year."

He says that will give banks a bit more latitude in managing their funding programmes over the coming period.

The core funding ratio determines the amount of funding from stable, reliable sources that the central bank requires commercial banks to hold.

Many households 'still highly leveraged'

The Reserve Bank also says the global turbulent will affect demand for New Zealand's products and the ability to borrow overseas.

Households and businesses have reduced debt but bank governor Alan Bollard says many are still highly leveraged, which leaves them vulnerable to a sharp slowdown.

Overall, the bank says the banking system is better placed to weather the current market turbulence than at the outbreak of the global financial crisis in 2008.