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End of retail deposit guarantee threatens fin coy liquidity: RBNZ

The looming end of the government's retail deposit guarantee is a threat to finance companies' liquidity, and the Reserve Bank is expecting more consolidation in the sector as firms struggle to attract funds.

Wednesday, 19 May 2010

by Paul McBeth

In its financial stability report, the central bank said it expects finance companies that were not able to attract the government's extension to the guarantee scheme may struggle to attract new funds and meet the large share of maturities falling due before the October expiry.

Only five finance companies have been accepted into the accepted scheme: Marac, South Canterbury Finance, Equitable, PGG Wrightson Finance and Fisher & Paykel Finance.

"Liquidity in the deposit-taking finance company sector has been very low, partly reflecting the difficulty some firms have had in retaining deposits," the report said. "Finance companies that are unable to utilities the extension may encounter difficulties if investor confidence is not rebuilt in the coming months."

The central bank joins accounting firm KPMG and rating agency Standard & Poor's in flagging the expiry of the initial crown guarantee as a threat to the viability of companies in the sector. All three agencies predict there will be a bout of consolidation as firms struggle to meet their liquidity requirements and the new prudential rules to boost their capital levels.

The central bank report said non-bank lenders that survive past the extended guarantee at the end of 2011 "are likely to be better capitalised and have better risk and liquidity management practices than those that have failed in recent times."

The Reserve Bank expects property development will struggle to source funding as a result of the finance sector's woes, with non-bank lending down 23% since the start of 2008.

"New business models will need to be developed to provide funding to viable projects in this sector, most likely involving a greater share of equity finance," the report said. "The past few years have illustrated that the business model employed by some finance companies of using retail deposits to fund property development was unsustainable."

Though the Reserve Bank found increased activity and stabilising prices in industrial property, which tends to lead commercial development, "significant weakness remains and any recovery will probably be slow."

The regulator said it expects to finalise its policy on liquidity requirements for non-bank deposit takers by the middle of the year, and will introduce capital and related party regulations around the same time. It is also working on legislation that will require NBDTs to be licensed with the Reserve Bank and include a resolution framework for dealing with distressed and failed finance companies.

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