Reserve Bank says banks 'stepped up' during Covid-19 - despite slap from Government

Friday, 31 July 2020

Reserve Bank deputy governor Geoff Bascand says the central bank will pay close heed to the negative consequences for banks of lower interest rates.

The Reserve Bank has finally delivered its verdict on bank behaviour during the early stages of the Covid-19 crisis and they are off the hook – for now.

“Banks’ initial response to the Covid-induced lockdown was strong,” deputy governor Geoff Bascand said in a speech on Friday.

“Banks stepped up and supported customers with mortgage deferrals, liquidity facilities and covenant relief.”

The praise contrasts with a slap given to banks by Finance Minister Grant Robertson in May, when he said the support banks were providing to small and medium-sized businesses was 'not meeting their needs nor our expectations as a Government'.

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National Party finance spokesman Paul Goldsmith and Reserve Bank governor Adrian Orr spar during a series of exchanges at a select committee in February.

That criticism came at a time when it was clear there was going to be low-take up by banks and businesses of the Business Finance Guarantee Scheme, which the Government had announced as a way of underwriting regular bank lending to businesses.

A few days later, a fiery Associate Finance Minister Shane Jones had pushed the boat out further, warning that banks were in danger of jeopardising their “social contract” if they didn't do more to help businesses survive the Covid-19 disruption.

In contrast, Bascand said the financial sector had supported businesses and households through “strong business continuity arrangements, the accommodation of many customers through the restructuring of borrowing terms, and only a relatively modest tightening of lending standards”.

Banks had so far deferred principal and interest payments on just over $21 billion of residential mortgage lending, and just over another $18b of mortgages had moved to “interest only” terms, he said.

That represented 14 per cent of the banking sector’s mortgage book, he said.

Reserve Bank figures show growth in bank lending to non-agricultural businesses has remained steady so far this year despite a big drop in demand from businesses for loans for new capital expenditure.

Reserve Bank figures show bank lending to non-agricultural businesses has continued to grow at a steady rate this year, despite lower demand from firms for borrowing for new plant and equipment.

Bascand said banks had begun “tightening several lending standards” but had mostly applied more conservative lending standards to riskier sectors that were more exposed to the Covid-19 shock such as tourism, retail, accommodation, and construction.

“While some tightening is understandable and will reflect the general deterioration in the quality of applications, banks should not become overly cautious and should continue to focus on the long-term prospects of the applicants,” he said.

Bascand indicated the test of the banks was not over.

Banks’ willingness to lend to “productive, job-rich sectors of the economy” would be a key determinant of the success of the economic recovery, he said.

“The banking sector could choose to hunker down and seek to ride out the storm until the good times roll around again.

“Or, it could continue to step up and play a crucial part in supporting New Zealand’s economic recovery.”

Bascand said now was the time for banks to “drawdown prudently” on their capital buffers to support customers.

“Shareholders will have to be patient for longer-term payoffs, but this forward-thinking, long-term approach will stand bank customers, banks, shareholders, the financial system and Aotearoa in the best position,” he said.

Prior to the Covd-19 pandemic, the Reserve Bank had demanded banks get on a path to build up their capital buffers so they could better ride out a future crisis.

Bascand reiterated that – as the crisis it had been concerned banks should prepare for had essentially come early – it would delay the full implementation of its new bank capital regime until July next year.

The Reserve Bank expected to provide more details on implementation by the end of the year, he said.

Bascand warned that low interest rates were likely to be an “enduring challenge for the banking sector”.

“In the short-term, low interest rates can be beneficial to banks by reducing funding costs, increasing asset prices and lowering default risk.

“However, a prolonged period of low interest rates could pose significant challenges to banks’ business models and profitability,” he said.

In a possible further obstacle to a negative Official Cash Rate – or extra quantitative easing – Bascand said the Reserve Bank would “pay close heed to that”.

“When we make monetary policy decisions we consider the consequences for financial stability as part of the decision-making process, including any adverse consequences of, say, lower interest rates, alongside the benefits for financial stability that may result from a quicker or stronger economic recovery,” he said.