The Reserve Bank’s focus on the housing market and the dairy sector in its latest Financial Stability report today was expected.

But the report also revealed that the Reserve Bank has a new area of concern – bank funding.

ASB chief economist Nick Tuffley said it appears funding for New Zealand banks is the new risk on the block.

With funding costs increasing in recent months, it is no surprise to see the Reserve Bank highlight the issue and pick out the widening gap between deposit growth and lending expansion, he said.

“The more this gap grows the more banks will have to look to offshore funding and that makes for increased vulnerability to global economic shocks.”

Tuffley said the Reserve Bank had simply noted that “banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility.” 

But credit rating downgrades (particularly for the Australian banks), geopolitical events and a “disorderly unwinding of vulnerabilities in China or Europe” were cited as potentially impacting on funding costs, he said.

“Funding costs could also be impacted as US President-elect Trump’s policies become clearer.”

Tuffley said that such pressures meant the OCR was likely to stay at 1.75% and that borrowers have probably seen mortgage rate lows.

Westpac senior economist Anne Boniface said the Reserve Bank implied that the widening gap between credit and deposit growth meant banks will need to rely more on offshore funding.

This potentially leaves them vulnerable to any increase in global market volatility, she said.

“And with funding the current very strong pace of credit growth becoming more challenging, this may reduce banks appetites to grow their lending.”

ANZ senior economist Philip Borkin agreed, saying the large gap between credit and deposit growth is not sustainable.

The gap can be filled by offshore funding but there is a limit on that front and, as such, banks are increasingly rationing credit and competing for deposits, he said.

“That’s a positive for medium-term growth (working against the boom-bust cycle) but means challenges in the near term as less credit results in less growth (in some key areas such as housing supply).”

How strong credit growth proves to be over the next two years will be inversely proportional to their economic assessment of prospects for 2019, Borkin said.

“Another year or two of strong credit growth would up the odds on an adverse turn in the economic cycle.”

Earlier this week, ANZ economists also said that cooling housing market activity, following the introduction of the latest LVRs, might have a little more persistence this time round.

One of the reasons it cited for this was bank behaviour.