European sovereign debt issues - reflected in Greece and Italy's faltering financial predicaments this week - have prompted the Reserve Bank to defer for six months a requirement New Zealand's banks increase their core funding ratios.
The increase of core funding ratios from 70% to 75% (to reduce reliance on overseas banks and boost funding from domestic bond sources) was to have been done by July 2012, but has been extended to January 2013.
Reserve Bank Governor Alan Bollard said in the bank's November 2011 financial stability report yesterday that financial markets have been particularly concerned about the sovereign debt situation in Greece, and the potential for it to spread to other European countries.
"This has made access to offshore debt markets more challenging for New Zealand's banks," Dr Bollard said.
The raising of core funding ratios is to lessen New Zealand banks' reliance on short-term overseas loans, which are more exposed to the effects of another global financial crisis.
Given market tensions, the Reserve Bank had decided to defer by six months its planned further increase in the core funding ratio.
Deputy governor Grant Spencer said the New Zealand banking system was better placed to weather the market turbulence than at the outbreak of the financial crisis in 2008.
"The banks have increased their capital and liquidity buffers over the past few years. They now have a stronger retail deposit base and their wholesale funding is at longer terms, making the banks less vulnerable to disruptions in offshore markets," he said.
Dr Bollard said that in New Zealand, households and businesses had been containing debt, which helped to reduce the country's overall external imbalance, but these efforts were offset, in part, by rising levels of public debt.
"Further, many households and farmers remain highly leveraged, which leaves them vulnerable to a sharp slowdown in global growth," he said.
• Standard and Poor's yesterday revised its view of the New Zealand banking industry to three out of 10 from two on a scale where one is the strongest, putting it on a par with Italy, Korea, the UK and the US, BusinessDesk reported.
The credit rating company said it had revised its banking industry country risk assessment on New Zealand to group three from group two. It also revised the economic risk score to three from two, while an industry risk score of four was assigned.
New Zealand's high level of private sector debt, at 150% of gross domestic product, and the concentration of lending to agriculture were cited as reasons for the downgrade.
Offsetting factors were conservative lending and underwriting standards, law which supports creditors and low levels of non-performing assets.
