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Reserve Bank warns on deposit risks

Thursday 16th November 2006

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The Reserve Bank, in its latest Financial Stability Report, warn there are some risks in the non-bank deposit taking sector that people need to be aware of. This include asset concentration, contagion risk and institutions' exposure to short-term rates.

Asset growth of the property specialists among the non-bank deposit-takers during 2006 has not slowed much below the 25% annual average growth rate seen over 2001-2005.

"Although there are only limited signs to date of increasing levels of problem loans in this sector, lending concentration is a particular risk - some of the property specialists would face solvency problems if there were a significant write-down of just one of their largest individual lending exposures."

The bank also notes that other non-bank lenders are similarly vulnerable to emerging sector weakness, particularly among those that have been growing their loan books rapidly and have no experience of preparing for, and managing, a slowdown.

"Such failures do not in themselves pose a threat to financial stability. But it is important to consider the impact they may have on other financial firms, which could threaten financial stability through a contagion effect."

The bank points out that a bigger contagion risk is the possibility of a non-bank deposit-taker failure undermining investor confidence in other similar financial firms.

But it does point out that there is no clear evidence that this has happened in reaction to the three recent failures.

However, there has been some comment that banks possibly have possibly received increased deposits as a result of a 'flight to quality'. "The majority of non-bank deposit-takers' lending is medium to long term. The most vulnerable appear to be the savings institutions, many of whom raise well over half of their funding at call or at notice periods of less than three months.

"They therefore need to assess how far rollover rates could fall under stress, and to estimate what other readily realisable sources of cash might be needed to fill any gap."

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