17 Feb 2011

Banks threatened with credit downgrade

9:45 pm on 17 February 2011

Finance Minister Bill English says the threat of a possible downgrade of Australian-owned banks underlines the importance of getting the Government's finances in better shape.

Credit ratings agency Moody's is to review the banks' credit ratings during the next 90 days, prompting fears of higher mortgage rates.

The New York-based agency says it is concerned by the Australasian banks' high dependence on foreign money markets.

The banks raise about 40% of their money overseas, which Moody's says leaves them at risk of running short of money in a global financial crisis.

Banking analysts say that warning alone could push up the banks' funding costs and mortgage rates in turn.

But Mr English says the banks are safe and the Government should try and limit the local funds it borrows that could be going to the banks by running lower deficits.

"Our banks are among the 10 or 15 strongest banks in the world, so it's not a real threat. But it does show how important it is that government does as much as it can to keep interest rates reasonable."

Meanwhile, Kiwibank has undercut the Australian-owned banks by lowering the rate on its six-month mortgages to below 6%.

PricewaterhouseCoopers banking partner Paul Skillender says the risk margin foreign lenders charge the banks had been falling since the last crisis and those costs will inevitably be passed on to mortgage rates.

However, Mr Skillender says that could take some time, as banks have borrowed heavily recently and will not be due to refinance that debt soon.