The experts say it's extremely unlikely that a New Zealand bank or its Australian parent will fail.

"The finance company sector was our sub-prime market - that's the analogy," said Mark Lister, head of research at investment and broking house ABN Amro.

"So we've had that - that low quality part of the banking and lending market has already collapsed."

The BNZ's general manager of strategy and marketing, Blair Vernon, said Australasian banks were in a different league to the US institutions that had run into trouble.

Trading banks here were required to have more capital behind them, and disclose far more financial information.

The need to raise overseas money was where New Zealanders would be hit hardest by the turmoil.

He believed the day was coming when floating mortgage rates would be lower than the traditional Kiwi home loan staple, the fixed rate, because of the cost of obtaining overseas money to back those fixed loans.

But credit generally was going to be expensive and that would affect all types of lending.

"I think it's questionable as to whether further cuts in the official cash rate [by the Reserve Bank] will be reflected ... "

The BNZ was advising homeowners not to fix their mortgages for too long. People were moving from the traditional two-year fixed loan to six-, 12- and 18-month terms, Mr Vernon said.

By that time interest rates would have come down and there would be some resolution to the credit crisis. "sourced from www.stuff.co.nz on 1^st October 2008

  International Market Update - US House of Representatives rejection of US Treasury proposal

What has happened?

• Overnight international share markets fell in response to the rejection by the US House of Representatives (lower house) of the current version of the legislation allowing the US Treasury to purchase around US$700 billion of mortgage backed securities, held by a number of financial institutions, that may be in a loss situation.
• The move is important as globally banks have become increasingly unwilling to lend to each other due to concerns about the extent of such debt held by banks and their creditworthiness.
• The US Treasury proposal sought to alleviate such concerns through the US Government effectively taking on the credit risk on such securities in exchange for an equity holding in those banks which elected to be part of the scheme.
• With the credit risk effectively underwritten by the US Government, banks globally could confidently resume "normal" lending practices and this would be supportive of growth and equity markets. 
• The first round rejection of the vote came as a surprise to the market and this has increased the extent of the reaction, with the US S&P 500 index falling around 8% in local terms (this was reduced to 6% in NZD terms given the 2% fall in the NZD/USD exchange rate.  
• The apparent reasons for the rejection are not about the aim or intent of the legislation per se, but more about the desire to ensure the overall effectiveness, that the right disciplines are placed on the market and to minimise the risk that the US taxpayer is being asked to assume.  

 Points to note  

• The rejection of this initial proposal is far from being the end of the matter. All US politicians and authorities have pledged to continue working towards a solution, which ultimately could deliver a better outcome for the market, US Government and economy.   

• There are a number of alternative proposals being actively discussed which are focussed on ensuring that the institutions impacted take their fair share of the losses with the US taxpayer only topping up the shortfall as and when they materialise. 
• This alternative solution is aimed at restoring confidence to lending markets and facilitating normal lending resuming based on the knowledge that lenders can rely on the US Government as a backstop should mortgage backed losses impact a particular institution.    
• This process will see a limited number of institutions being forced to seek private sector solutions but may ultimately prove more sustainable and lead to a stronger financial sector.
• We expect ongoing consolidation within the banking sector as banks voluntarily arrange to be taken over or merge to preserve shareholder value e.g. JPMorgan Chase and the purchase of Washington Mutual and Citicorp's purchase of Wachovia.
• This will also leave the US Government in a more robust position.   In the interim the US treasury, along with all other central banks, are taking the central role in normal interbank money market activities acting as the conduit by taking deposits from banks seeking the safety of government guaranteed investment and providing access to liquidity for those requiring it.  In addition central banks globally are injecting more than adequate liquidity into the banking system to ensure all banks have access to cash on a short term basis and extending their term lending facilities.  
• The vast majority of banks are in a sound overall position and therefore such facilities limit the impact of the current liquidity squeeze, allowing them to keep operating and continuing to lend which is important to maintaining growth.  In addition the moves already initiated, such as the purchase of Fannie Mae and Freddie Mac by the US government, are also allowing the retail lending markets to continue normal operations. 
• European governments and the UK government have been moving decisively to assist their own banking sectors, injecting cash or nationalising institutions which have become subject to the liquidity squeeze.    

Impact on portfolios has been limited

• The impact from the latest move in the underlying markets has again been mitigated to some extent by the fall in the NZD, which has fallen around 2% overnight, offsetting part of the fall in international markets given the international shares portfolio remains 80% unhedged.     
• All the MIA profiles contain fixed interest allocations and these sectors will be delivering strong capital gains as the yields on long dated, AAA government backed bonds have fallen substantially.  

Portfolio returns month and quarter to date 

 Overall the impact on the portfolios for the quarter remains relatively modest with the Balanced portfolio achieving a flat return for the quarter, as set out below:

The limited impact of market movements on the portfolio highlights the effectiveness of the ongoing tactical and strategic asset allocation and risk management decisions including:

• Largely unhedged currency exposure which has offset much of the decline in offshore markets and has acted as a strong mitigator of offshore volatility. The portfolio remains 80% unhedged.
• Long duration fixed interest positions with the absolute highest credit quality of AAA rated government back bonds have benefited from the flight quality which has pushed down yields and provided capital gains.
• Being significantly underweight US financial stocks.
• The active managers have also added value reducing the impact on the overall portfolio e.g. Warren Buffet's Berkshire Hathaway fund is up 16% over the month.  

The outlook   

The US political system and central bank authorities globally are actively looking to deliver a comprehensive and sustainable solution which will ensure that those institutions which took the risk around the lending actually bare the cost of those decisions. At the same time this is being balanced against ensuring that the wider US economy is not materially impacted.    It is expected that the US Congress will work continuously to achieve a positive outcome and that an alternative solution will be voted on in early October. 

In Europe, collective government action is being taken to ensure that where institutions are impacted by the credit squeeze there is an effective solution through cash injection or nationalisation.  The achievement of a solution in the US will have positive impact on markets around the world.

 Conclusion

 While the current decision-making process in the US may be frustrating, ultimately a comprehensive plan is likely to be adopted. When that is delivered we would expect a substantial improvement in market sentiment and this will support a recovery.