Alan Bollard

By Dave Williams of NZPA

Wellington, May 19 NZPA - Reserve Bank Governor Allan Bollard says he will not crack the whip on banks to try to force them to lend to businesses to promote economic recovery -- amid a call for rule changes to promote business lending.

The Reserve Bank's six-monthly financial stability report was released this morning, saying New Zealand's financial systems were broadly improving, but global financial markets remained fragile.

New Zealand, not greatly exposed to Europe's problems but still vulnerable because of an external deficit, had seen the current account deficit improve and households taking an appropriately cautious approach to debt.

However, apart from agriculture, businesses borrowing continued to contract, Dr Bollard said.

The New Zealand Manufacturers and Exporters Association (NZMEA) today called for changes to capital adequacy rules on lending to businesses, recapitalising Kiwibank and addressing the tax balance to counter the contraction.

A majority of respondents to NZMEA survey last year reported their bank had increased the margins they paid on credit facilities, tightened associated covenants and also increased charges associated with the facilities.

NZMEA chief executive John Walley said businesses in the tradeable sector were today still facing the same problems.

"It is little wonder that property lending is favoured by the banks while it has a lower risk weighting under Reserve Bank capital adequacy ratios and demand for property is fuelled by tax advantages. As long as property is advantaged why would banks and investors change this behaviour?

"Behaviour will change when the rules change; we can but hope to see some movement on asset tax in the budget tomorrow, along with a serious policy package to promote growth in the traded economy."

Dr Bollard also came under similar scrutiny from Green MP Russel Norman and Labour MP David Cunliffe regarding the behaviour of New Zealand's banks, which are mainly owned by Australian institutions, when he fronted up to politicians in Parliament's finance and expenditure select committee today.

Mr Cunliffe questioned why banks still found it easier to lend to the household sector "and harder to the business sector at a time when the New Zealand economy needs to be productive to come out of this recession".

He also questioned Dr Bollard's statement that the banks "had been through a tough time" and said that from the Reserve Bank's own figures their profitability had risen to the highest levels on record.

"If that is the case, surely the excuse they have had it tough and they can't afford to lend to New Zealand businesses is past its use by date."

Mr Cunliffe asked if the Reserve Bank could say to the banks: "We want to see you supporting the New Zealand business sector rather than fuelling another property boom that is going to bankrupt this country".

But Dr Bollard said it was not the Reserve Bank's role to force banks to lend.

By not lending they were not making money. They should be competing for loans and the signs they were doing that were reasonably good, he said.

"Should it be more attractive financially to lend to businesses than to households we would rather see that swing happen through any tax rearrangement which would help remove the advantage of property borrowing."

Dr Bollard said banks had probably felt they could rely more on houses as security.

"I don't think there is a big risk of fuelling a big property boom in the next couple of years."

There was a risk of a credit restrained recovery and the bank was sending a clear message to the banks.

"We repeat our message to banks, it is important they be there to lend for the recovery in appropriate circumstances, and we have some reasonable confidence that that will happen."

Deputy bank governor Grant Spencer said demand for lending was also important.

The household sector was leading an economic recovery but the business sector was not expected to really to start increasing activity until later this year and into next year.

In Australia, where the recovery had been stronger, lending to corporates had been very flat as they were raising their money from capital markets, he said.