The banking system

Figure 2: Sources of non-financial private sector borrowing (as at 31 March 2020)

_{Source: RBNZ SSR, RBNZ Bank Balance Sheet (BBS), RBNZ Securities Survey.}

_{Note: Shares may not sum to 100 due to rounding.}

The New Zealand banking system is highly concentrated. While there are currently 27 registered banks, the four large Australian-owned banks (ANZ, ASB, BNZ, and Westpac) are responsible for 85 percent of bank lending (figure 2). The five New Zealand-owned banks account for 8 percent of bank lending.

For the Australian-owned banks, the New Zealand subsidiaries’ total assets represent between 10 and 15 percent of their respective Australian parent group’s total assets.These Australian-owned banks all have high credit ratings by international standards (a table of current credit ratings is presented here).

Despite the New Zealand financial system being dominated by banks, the banking system itself is relatively small by global standards. Total assets of the banking system were just over $631 billion NZD in March 2020, which at around 184 percent of GDP is at the lower end of the range for OECD countries.

A consolidated balance sheet of the banking system is presented in table 1. Loans and advances account for 76 percent of banking system assets. Banks hold a small amount of trading securities and their holdings of derivatives are primarily for hedging purposes. Deposits account for over 60 percent of liabilities and equity.

Table 1: Consolidated balance sheet of all banks¹ (as at 31 March 2020)

_{Source: RBNZ BBS.}

About 62 percent of bank lending is to the household sector. The vast bulk of which is secured against housing assets (figure 3). Lending to the agriculture sector accounts for around 13 percent of total lending, of which the dairy sector accounts about for two thirds. Lending to the business sector accounts for 25 percent of total bank lending, around 34 percent of which is property related.

Figure 3: Sectoral banking system assets (as at 31 March 2020)

_{Source: RBNZ BBS.}

Bank funding is mostly sourced from domestic deposits (non-market) or the domestic wholesale market (figure 4). However, a small pool of domestic savings creates a structural need for the banking system to obtain funding from offshore. Currently around 23 percent of non-equity funding is sourced from offshore, with just under half of this at maturities of less than one year. Around 28 percent of non-equity funding is from the wholesale market.

Figure 4: Bank non-equity funding source (locally incorporated banks)

_{Source: RBNZ Liquidity Survey.}

New Zealand’s net external liabilities are high relative to most other developed economies, as a result of the weak domestic savings rate (figure 5). Offshore bank funding accounts for almost two-thirds of New Zealand’s net external liabilities. This creates a vulnerability to disruptions in global financial markets. However, almost all debt is hedged into NZD and reliance on short-term funding markets has declined markedly since the global financial crisis.

Figure 5: Net international investment position (% of GDP, as at 31 December 2019)

_{Source: Haver Analytics.}

The majority of bank funding is short-term (figure 6), with around 82 percent having a maturity less than one year and just 12 percent with a maturity greater than two years. In comparison, bank assets have much greater maturities due to the maturity transformation function of the banks. Around 59 percent of lending is mortgages, at terms of up to thirty years. However, these assets have a relatively short time to re-price. Around 15 percent of mortgage loans are floating, and 48 percent are fixed loans due to be re-priced within one year (figure 7). Only about 8 percent of loans are fixed for a term greater than two years.

A mismatch between asset and liability maturity structure generates rollover and re-pricing risk. Despite banks hedging the majority of their interest rate risk, they remain exposed to offshore funding market volatility. Any increased cost of funds can flow through to retail rates if funding is rolled over at higher prices. This risk is partly mitigated by the Core Funding Ratio which requires banks to maintain a minimum level of stable funding.

Figure 6: Bank funding composition (% of total non-equity funding, locally incorporated banks)

_{Source: RBNZ Liquidity Survey.}

Figure 7: Time to re-price on housing loans

_{Source: RBNZ BBS.}

¹ For a more comprehensive balance sheet see the S10 table.