Brad Olsen: Infometrics Principal Economist on banks needing to repay $9.2 billion in Covid-era loans to the Reserve Bank

New Zealand banks are being asked to pay up in the next few months. 

Kiwibank, BNZ, Westpac, ANZ and ASB will need to repay around $9.2 billion in cheap Covid-era loans to the Reserve Bank. 

Infometrics Principal Economist Brad Olsen told Mike Hosking that they have variety of options they can use to repay the money. 

He says the banks knew when taking out these loans they’d have to pay them back eventually. 

Olsen told Hosking that if they’re not ready to pay them back, they probably don’t qualify to be called bankers at this point.  

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Episode Transcript

Speaker 1 (00:00):
Inspector of COVID and it's mad fiscal ideology still being

(00:02):
played out with news our banks are a fortune to
the Reserve Bank. It's about a bit over nine billion
from the infamous Funding for Lending program. The FLP topped
out at nineteen billion. What's left is due in the
next couple of months. Brad Olsen in for Metric's Principle
Economists back. Well, this Brad morning to you.

Speaker 2 (00:17):
Good morning.

Speaker 1 (00:18):
Bank's not short of money, as we've seen in the
results this week, that they simply pay it back or
funded out some sort of way.

Speaker 2 (00:24):
I mean either or they do have the options on
either side to do that. And let's be clear, they
knew when they were taking out these levels of loans
that they'd have to pay them back eventually. So if
they're not ready to pay them back, they probably don't
qualify to be called bankers at that point. So they
will be ready. They will have sort of gone through
this process. Now, what I think the difference going forward
is that, of course the funding that they're going to

(00:44):
have out the other side is going to be more
expensive now because these funding for lending loans they were
priced at the ocr and so to be fair. The
bank's actually been paying less in the last you know,
a couple of months over the last year, as the
official cash rate has come down, but still out the
other side they will be paying higher than whatever their
interest rate is. Right the second is it looking.

Speaker 1 (01:06):
True to say, just correct it for people who might
be confused with all this hyperlutant economic talk. If you've
got the money for next to nothing, which is what
they did, why wouldn't you flick it out into the
mortgage market if you can of four or five or
six or whatever, and you're creaming it, aren't you.

Speaker 2 (01:19):
Well, essentially yes, And that was the idea at the time,
is that if the Reserve Bank was able to give
cheap loans out to the banks, and the banks would
pass those cheap loans on through to the rest of
the economy, that would stimulate a bit of activity. It
would keep inflation from going too low. And as it's
turned out, we did that really really well and let
inflation get far too high off the other side. But

(01:39):
you're right, the banks have been lending this out at
retail rates, and for a period retail rates below and
at the moment they have gotten quite a bit higher.
They've of course come back a bit over time. But
I think as well, I mean one of the areas
because the question keeps coming up, right, what do the
banks do? You know they're just going to use their
current level of mortgages to help repay this, you know,
will they have to go out into the market and

(02:00):
tap you know, some money themselves. I think you look
at what's been happening in recent times between people's you know,
on calls, savings accounts versus you know, the sort of
money that's the reserve bank, Sorry, the retail banks are
having to pay out on term deposits. Is a healthy
little margin there. You look at the fact that a
lot of people have been sitting on higher floating mortgage
rates waiting for our interest rates to come down again.

(02:23):
It might work out well for a home loan mortgage
holder to do that for a couple of weeks, but
for the banks are still effectively making money on the
difference between those different lending options. So, long story short,
I have no issue at all with thinking that the
banks are absolutely ready to repay this. They've known it
was going to happen. They've always been ready to have
to cash.

Speaker 1 (02:41):
Did the fact they've got nine left from nineteen show
you just how hopeless Adrian was.

Speaker 2 (02:47):
I wouldn't put it that way. I think, you know,
when we looked at the Funding for Lending program, it
was the last part of the bigger Reserve Bank announcements
that came out around what they needed or wanted to
do around monetary policy. In hinds, I think it was
clear by that point probably that we didn't need all
that much additional stimulus in the economy, and we did
it anyway, so it certainly didn't help at that point. Today,

(03:10):
I do think that again, when we looked at it,
we went, Wow, we had you know, large scale asset purchases,
you know, the money printing. We had the very very
low ocr When it did come out, I think quite
a few of us probably did go I didn't realize
that we were in that much of a state that
we needed such a big another bazooka to be brought in,
and hindsight's probably proven that out.

Speaker 1 (03:28):
I think that's probably true. Bradley appreciate it as always,
have a good weekend. Brad Olson in FORO Metrics Principal Economists.

Speaker 2 (03:34):
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