Bancorp Treasury Services Limited

Make Risk Count.

BEWARE STING IN NON-BANK DEPOSIT TAKING TAIL

25 August 2009

Businesses are being warned that they could be in jeopardy if they fail to plan for hidden costs that will arise after new Reserve Bank regulations for non-bank deposit takers take effect from March 2010. The regulations are for non-bank entities, including the 60 non-bank deposit takers such as credit unions, building societies and finance companies that are guaranteed by the Crown. The most significant regulatory requirement will be to mandate all non-bank deposit takers to receive a credit rating from one of three global agencies.

Jon Clarke, Director at independent financial risk management advisors Bancorp Treasury Services, says although the Reserve Bank is sending a positive signal by improving regulation to assist the inflow of funds into the non bank sector, the regulation carries a sting in the tail for unprepared businesses.

“Requiring non-bank deposit takers to have a credit rating will give depositors better protection through greater transparency. However, it is inevitable that non-bank deposit takers will receive significantly lower credit ratings than is the case for major trading banks,� says Mr Clarke.

“This will increase their funding costs which, in turn, will result in higher borrowing costs and less accessible credit for businesses and consumers,� says Mr Clarke.

The risks for the non-bank deposit takers and their clients are further increased by the Crown’s uncertainty about whether it will extend the current guarantee beyond October 2010.

Mr Clarke says it is imperative for businesses intending to remain as non-bank deposit takers, and their clients, to take immediate steps to identify the degree to which the changes will impact upon their business’s ability to survive.

Mr Clarke stressed the importance of immediate action for all parties, who are involved with or are non-bank deposit takers: “If you wait until all the regulation comes into force before identifying, assessing and planning to manage the risk, you are probably leaving it too late.�

How to manage risk associated with changes to the non-bank deposit taker regulations

Businesses should identify, assess and prepare to manage the following risks associated with changes to the non-bank deposit taker regulations:

  • funding costs after 1 March 2010
  • funding costs after October 2010
  • how funding cost rises will impact upon their business model’s ability to survive.
  • less credit for borrowers from the sector

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