11 Nov 2009

More finance company closures likely - Reserve Bank

10:42 pm on 11 November 2009

The Reserve Bank has warned it expects to see more finance companies go under as they struggle to cope with the consequences of the recession.

Overall, it says in its six-monthly financial stability report, the financial system is in better shape now than it was six months ago.

The Reserve Bank says the pressures on financial markets have eased and economic confidence has improved.

But the report says the high value of the New Zealand dollar is a problem and it is important there is no return to a housing boom fuelled by borrowed money.

Deputy governor Grant Spencer says retail banks in New Zealand and Australia have weathered the crisis better than most.

Non-bank institutions, though, remain under pressure as they try to repair the financial damage caused by the recession and he says further rationalisation and closures in the non-bank sector are likely.

More shocks possible - Bollard

Governor Alan Bollard says confidence is returning, and economic forecasts are generally being revised upwards, but the global banking system remains vulnerable to further shocks.

"We note there will be more bad debts coming, banks are raising more capital still and there'll be a continuing impact on global credit availability and price.

He says the easy monetary and fiscal policies that have supported the recovery will need to be reversed out at some point.

Dr Bollard says risk appetite has returned to the global markets, which has pushed the dollar up, and there has also been a pickup in the housing market.

He says the country needs to ensure there is no return to a debt-fuelled housing cycle, which would reduce competitiveness and add to exchange rate pressure.

The report had little effect on the dollar, which was trading at about 74 US cents.