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Summary
- The Central Bank mentioned it accidentally revealed its verdict to launch Funding for Lending in a letter sent to non-bank financial institutions and disclosed the decision 45 minutes ahead of its monetary policy statement.
- Funding for Lending scheme is a tool for RBNZ to give banks funding at low-interest record rates while anticipating it will lower funding costs and the decline in costs will be passed on by banks to lower household and firms borrowing costs.
- RBNZ has appointed Deloitte to independently review internal processes and is due to comment further once the review is done.
The Reserve bank of NZ has admitted it accidentally broke the news of Funding for Lending scheme implementation to some non-bank lenders about 45 minutes prior to the official announcement of its Monetary Policy Statement.
The bank claimed that there were no particulars of the scheme in the letter and it was unlikely to give anyone a market edge, but the bank is taking the matter seriously.
The bank stated that the letter did not have any specifics of the scheme and was unlikely to provide anyone with a market advantage, but the bank is taking the matter seriously.
The FLP tool
On 11 November, RBNZ Governor Adrian Orr announced FLP would provide banks cheap lending based on the OCR of 0.25%, will start next month and the estimated size of FLP could be about $28 billion based on the take-up.
ALSO READ: RBNZ likely to encourage more lending through its FLP tool
Funding for lending scheme is a tool through which RBNZ will fund the banks at special rates in the anticipation that it will flow through banks, which will further reduce lending rates for businesses and households. The motive of the tool is to provide cheap money and recover strongly from the pandemic.
RBNZ expects that the scheme would lower the funding costs of the financial system and subsequently borrowing costs for firms and households while supporting the availability of credit in the economy.
DO READ: Funding for Lending (FLP) a big boon for NZX Banks
The central bank has also kept its options open on the likelihood of taking OCR negative next year.
Details of the letter
The letter confirmed that the FLP would take place and observed the impact it might have on the non-bank deposit-taking (NBDT) sector, which may not have the needed collateral to fulfil eligibility obligations.
Geoff Bascand Deputy Governor and General Manager financial stability stated that several institutions had raised questions about the FLP's competitive impact on NBDTs.
He added that the main issue is that the initiative would decrease financing costs for major banks and leave NBDTs at a competitive disadvantage, thus hindering their ability to supply loans to many parts of the financial system.
Mr Bascand also appreciated the concern and hoped to satisfy from the assumption that the FLP would diminish funding costs for both large banks and NBDTs to a comparable degree.
The central bank has appointed Deloitte to review its internal procedures objectively, and when the review is finished, RBNZ will comment further on any outcomes.
