RBNZ Delays Proposed Bank Capital Lifts; Supports Liquidity

In a statement, the Reserve Bank of New Zealand says New Zealand’s financial system is sound, with strong capital and liquidity buffers, but faces significant uncertainties from the impacts of COVID-19. The Reserve Bank is announcing additional measures to support the provision of credit and market functioning.

Reserve Bank Deputy Governor Geoff Bascand says the situation around COVID-19 is evolving rapidly, and there is much uncertainty.

“To support credit availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months – to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary.”

“We are taking this action now to help support lending in the economy at time when there is a lot of uncertainty. The Reserve Bank’s expectation is that banks will utilise this flexibility to maintain lending to households and businesses. Banks have significant buffers above current regulatory minimums, and we encourage them to use them,” Mr Bascand said.

“Deferring the capital framework implementation provides banks with significant capital headroom. We estimate that this headroom will enable banks to supply up to around $47 billion more lending than would have been the case, had the decisions been implemented as planned.”

Mr Bascand said the Reserve Bank is currently identifying other regulatory initiatives that can be deferred, to reduce the burden on financial institutions at this time of uncertainty. These will be announced in coming days. The Reserve Bank is working closely with the Council of Financial Regulators and international regulators.

Assistant Governor Christian Hawkesby said the Bank is also ensuring there is sufficient liquidity in the financial system, through regular market operations.

“The Bank has a number of operational tools at its disposal to support liquidity and market functioning in New Zealand. This has helped the domestic cash market and foreign exchange swap market to continue to function effectively over recent weeks,” Mr Hawkesby says.

“Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. We will continue to monitor developments closely and engage regularly with market participants to ensure we are ready to provide support if needed.”

The Reserve Bank also announced the following changes to the pricing of its standing facilities and ESAS accounts, in part to assist cash market functioning at a lower OCR:

  • Cash that ESAS account holders have on deposit at the Reserve Bank that is in excess of their allocated ESAS credit tier will be remunerated at the OCR less 25 basis points (from OCR less 75 basis points).
  • Bonds lent through the Bond Lending Facility well be lent at the OCR less 50 basis points (from OCR less 75 basis points).
  • A maximum rate will be set for bonds lent through the Repo Facility at the OCR less 50 basis points (from OCR less 75 basis points).
  • Cash will continue to be lent via the Overnight Reverse Repo Facility at the OCR plus 25 basis points until further notice.

The Reserve Bank has a number of tools to provide additional liquidity, and support to market functioning, should these be required in the future:

  • The ability to provide term funding through a Term Auction Facility (TAF) which can provide collateralised loans out to 12 months. This facility was previously provided from 2008 to 2010.
  • The Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
  • The ability to provide liquidity to the NZ government bond market to support market functioning.

Mr Hawkesby says the Reserve Bank continues to monitor developments, and is ready to act to ensure markets and the financial system operate in a stable and efficient manner.

RBNZ Cuts Cash Rate to 0.25% (Down from 1%)

The Reserve Bank New Zealand announced today that following an emergency meeting yesterday, the Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months. The also signalled the likelihood of QE to follow.

The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus.

Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.

Financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes.

The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.

Several factors will continue to assist and support economic activity in New Zealand.

New Zealand’s financial system remains sound and our major financial institutions are well capitalised and liquid. The Reserve Bank is also ensuring that the banking system continues to function normally.

The Government is operating an expansionary fiscal policy and has imminent intentions to increase its support with a fiscal package to provide both targeted and broad-based economic stimulus.

The New Zealand dollar exchange rate has also depreciated against our trading partners acting as a partial buffer for export earnings.

And, the Monetary Policy Committee agreed to provide further support with the OCR now at 0.25 percent. The Committee agreed unanimously to keep the OCR at this level for at least 12 months.

The Committee also agreed that should further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.

The members discussed the broad range of Official Cash Rate (OCR) settings that would be suitable. Staff briefed the Committee on the scale of policy stimulus required given deteriorating global conditions and the impact of travel restrictions. The Committee discussed the relative contributions of planned fiscal and financial stability measures in consideration of the monetary policy response. Staff also advised that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.

Subsequent Committee discussion focused on two scenarios:

  • a 0.5 percentage point cut in the OCR to 0.5 percent, followed by an assessment of the rapidly developing COVID-19 situation, with the ability to follow up with more stimulus as needed at the scheduled March OCR review
  • A 0.75 percentage point reduction in the OCR to 0.25 percent.

Members noted that lower interest rates would likely support the soundness of the financial system – in the context of the Committee’s Remit.

Given views on the required level of stimulus given the economic impact of COVID-19, the committee agreed a 0.75 percentage point reduction in the OCR would be a more suitable option.

Auction Results 14 March 2020

Domain released their preliminary results for today.

The results today are pretty strong compared with a year ago, so the virus has yet to hit (but Melbourne is stronger following last weeks long weekend).

Canberra listed 51 auctions, reported 30 and sold 23, with 1 withdrawn and 7 passed in to give a Domain clearance of 74%

Brisbane listed 74 auctions, reported 38 and sold 26 with 6 withdrawn and 12 passed in to give a Domain clearance of 59%.

Adelaide listed 62 auctions, reported 40 results with 27 sold, 3 with drawn and 13 passed in to give a Domain clearance of 63%.

FED Intervenes Again

Overnight we got news that due to the market disruptions, the Fed is buying more Treasuries across the yield curve.

To address temporary disruptions in the market for Treasury securities, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has updated the current monthly schedule of Treasury purchase operations.  

Today, the Desk will conduct purchases in each of five maturity sectors below at the times indicated, subject to reasonable prices.  

  • 20 to 30 year sector at 10:30 – 10:45 am and 2:15 to 2:45 pm for around $4 billion each
  • 7 to 20 year sector at 11:15 – 11:30 am  for around $5 billion
  • 4.5 to 7 year sector at 12:00 – 12:15 pm for around $8 billion
  • 2.25 to 4.5 year sector at 12:45 – 1:00 pm for around $8 billion
  • 0 to 2.25 year sector at 1:30 – 1:45 pm for around $8 billion

These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak.  These purchases are part of the $80 billion of planned monthly purchases, including both $60 billion of reserve management purchases and $20 billion of reinvestments of principal payments received from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities. In these purchases, the Desk will include securities that are cheapest to deliver into active Treasury futures contracts as eligible securities for purchase. The Desk intends to further bring forward remaining purchases for this monthly calendar and adjust terms of operations as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.  A revised schedule will be posted.

And the Repo operations continue to grow:

Net effect is to continue to grow their balance sheet. What else will they buy to try to shore up the markets? And what is the cost of all this?

Economic Armageddon Now Requires a $782 Billion Repo Bailout

The latest update from Economist John Adams and Analyst Martin North, as the financial system continues on life-support.

Central banks are in a desperate rush to keep interest rates down in order to prevent a default of a major bank or financial institution.

RBA Injects $8.8 Billion Bank Liquidity

The AFR is reporting that the RBA is supporting liquidity in the banking system in Australia.

The Reserve Bank of Australia is pumping $8.8 billion into short-term commercial bank funding to ease a squeeze in global credit markets.

The emergency move follows a similar intevention by the New York Federal Reserve overnight.

The US Treasury market seized up after debt investors were spooked by US President Donald Trump closing the American border to European travellers and his broader handling of the coronavirus crisis.

Local bond market sources reported an evaporation of liquidity, heavy selling pressure, clogged dealer balance sheets and upward pressure on government bond yields in global government bond markets, including the US and Australia.

“There’s heavy selling of bank bill futures, a bit like the GFC,” a trader said.

ECB unveils fresh stimulus to counter coronavirus ‘major shock’

European Central Bank chief Christine Lagarde warned on Thursday that the coronavirus had delivered a “major shock” to the global economy that required urgent, coordinated action, as she unveiled fresh stimulus to keep credit flowing. Via France24

The latest major central bank to jump into the fray, the ECB launched a flurry of measures to cushion the impact of the virus, including increased bond purchases and cheap loans to banks.

But it surprised observers by leaving key interest rates unchanged.

The Paris and Frankfurt stock exchanges extended earlier losses after Lagarde‘s announcements to post drops of more than 10 percent in the early afternoon.

“The spread of the coronavirus COVID-19 has been a major shock to the growth prospects of the global economy and the euro area,” Lagarde told reporters in Frankfurt.

“Even if ultimately temporary by nature, it will have a significant impact on economic activity.”

She urged governments to step up and do their bit alongside monetary policymakers as fears mount of a credit crunch that could destabilise banks and hurt small businesses.

“Governments and all other policy institutions are called upon to take timely and targeted actions,” she said.

“In particular, an ambitious and coordinated fiscal policy response is required to support businesses and workers at risk.”

Whether the eurozone manages to avoid a recession will “clearly depend on the speed, the strength and the collective approach that will be taken by all players,” she said.           

Super-cheap loans

As part of its stimulus package, the ECB’s governing council agreed a new round of cheap loans to banks, known as long-term refinancing operations (LTROs) “to provide immediate support to the euro area financial system”.

They also eased conditions on an existing “targeted” LTRO programme, aiming to “support bank lending to those affected most by the spread of the coronavirus, in particular small- and medium-sized enterprises”.

And the ECB will pile an extra 120 billion euros ($135 billion) of “quantitative easing” (QE) asset purchases this year on top of its present 20 billion per month.

The QE scheme will include “a strong contribution from the private sector,” the ECB said, as room to buy government debt while respecting self-imposed limits has grown tight.

On top of the monetary measures, the ECB’s banking supervision arm said it would allow banks to run down some of the capital buffers they must build up in good times to weather crises.

Its teams supervising individual lenders may provide more flexibility to institutions under their remit, such as giving them more time to patch up shortfalls in their risk management, while a broader range of assets will count towards the watchdog’s capital requirements.

‘Bravo’

Ahead of Thursday’s meeting, analysts had highlighted tweaks to the ECB’s bank lending scheme in particular as a critical tool for virus response.

“Bravo!” Pictet Wealth Management analyst Frederik Ducrozet tweeted after the statement, hailing the ECB’s “bold decisions”.

Ducrozet noted that under the changes to the TLTRO programme, lenders that loan the cash they get from the central bank on to the real economy will enjoy an interest rate potentially as low as -0.75 percent.

At 0.25 percentage points below the rate the ECB charges on banks’ deposits in Frankfurt, the difference represents an effective subsidy to the financial system.

Meanwhile the central bank dispensed with what many expected would be a purely symbolic interest rate cut of just 0.1 or 0.2 percentage points.

The US Federal Reserve last week and Bank of England on Tuesday had space to cut interest rates by half a percentage point each to ease financial conditions.

But the ECB’s already-negative deposit rate robbed it of that option.

Governments on hook

Lagarde again reiterated the ECB’s long-standing call on governments to do more with their fiscal powers to buttress the eurozone economy.

In a conference call Tuesday with European heads of government, the former International Monetary Fund (IMF) head “drew comparisons with past crises” like the 2008 financial crisis, a European source told AFP.

Such past trials were overcome by central banks and governments working in concert.

In mid-February, Lagarde reiterated that “monetary policy cannot, and should not, be the only game in town” to stimulate the economy.

Italy on Wednesday announced 25 billion euros of support to its economy and the European Union has also mobilised up to 25 billion euros.