Bank loan losses will rise - Reserve Bank

Banks face rising loan losses and are borrowing hundreds of millions from the Reserve Bank because of frozen world credit markets.

However, big banks are well placed to handle the downturn and bad loans will not rise as much as they did during the early 1990s, the Reserve Bank says in its half-year Financial Stability Report.

The bank said there had been a virtual freeze in lending between banks since the start of September and a return to normal could take up to six months.

Deputy governor Grant Spencer said ‘‘non-performing loans’’ for the big banks had picked up recently to about 0.5 per cent of loans and that could keep rising into next year.

In the economic fallout from early 1990s recession, the ratio of bad loans reached between 6 per cent and 8 per cent.

‘‘We are not anticipating we are going to get back into that territory, though loan losses will probably increase in the coming period,’’ Mr Spencer said.

Forced sales of homes by banks were also expected to rise, though the banks were taking a ‘‘moderate approach’’.

The Reserve Bank has said it expected a 15 per cent fall in house prices over time.

About 43 per cent of bank assets are in home loans. About 23 per cent of mortgages are for loans worth more than 80 per cent of the value of the home when the loan was first made, according to the report.

‘‘There is big bank exposure on mortgages but we consider it generally very good risk,’’ Dr Bollard said.

The Reserve Bank estimated that in a worst-case scenario, about 7 per cent of home loan borrowers would end up in ‘‘stress’’ - spending more than half their disposable income to repay home loans and so more prone to defaulting.

For the first time yesterday, trading banks borrowed $500 million long term, for up to a year, from the Reserve Bank.

There is expected to be a weekly auction for similar or even larger amounts. While world credit markets were still defrosting, New Zealand banks had not frozen lending to their customers, Dr Bollard said.

‘‘Actually credit growth is continuing, but they have been reducing the rate of growth and riskier proposals are finding it quite tough,’’ he said.

Dr Bollard urged big banks to keep lending to help firms make investments.

‘‘That’s important for New Zealand.’’

The financial and economic disruption from the credit crisis was ‘‘far from over’’, he said.

‘‘We have been encountering extreme disorder in international financial markets.’'

But the risk of a global financial meltdown was low, with some signs of a credit thaw and big banks starting to lend, though for relatively short terms, he said.