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Financial system sound despite failures: RBNZ

Thursday 21st August 2008

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New Zealand's financial system is sound and functioning well despite the spate of failures of finance companies, according to the central bank.

More than 20 firms either failed or suspended payments to investors in the past two years as sources of funding shrank in the face of a global credit squeeze. Still, the nation's finance system is "fundamentally sound," according to Toby Fiennes, the central bank's head of prudential supervision.

"It is important to keep a sense of perspective," Fiennes said in a speech to a business audience in Auckland today.

Institutions accounting for over 90% of household financial assets "are well capitalized businesses and give no apparent reason for concern."

To bolster liquidity in the banking system, in May the central bank widened the range of securities it would accept as collateral from firms seeking cash via its repo operations to include residential mortgage-backed securities. No firms have taken up the offer yet, possibly because of the time required to structure the securities, bank spokesman Mike Hannah said.

Fiennes said the main casualties have been property finance companies, where investors were "exposed to significant risks in exchange for a relatively small margin over bank deposit rates."

"Our banks are navigating their way through the current turmoil well," he said. "Credit ratings remain strong and loss provisioning is not abnormal for this point in the cycle," he said.

New Zealand's largest banks have Australian parents. Commonwealth Bank of Australia this month posted the slowest profit growth in four years on rising bad debts. National Australia Bank has set aside A$830 million for collateralized debt obligations and ANZ Bank forecast a drop in annual profit reflecting bad debts.

By Jonathan Underhill

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