Coronavirus: Reserve Bank announces new facility to support corporate funding

Reserve Bank Governor Adrian Orr
The Reserve Bank is providing banks with another channel to fund corporate clients. Photo credit: Supplied.

The Reserve Bank has announced it will take corporate and asset-backed securities to inject more cash into the corporate sector.

It comes after it announced that as part of a large scale asset purchase (LSAP) programme, it would buy up to $30 billion of secondary market New Zealand government bonds over the next 12 months.  

To provide liquidity to the corporate sector, the Reserve Bank says it will repurchase eligible corporate and asset-backed securities, as part of its weekly open market operation (OMO).

Reserve Bank assistant Governor Christian Hawkesby said that the new facility would give banks another channel to continue funding corporate clients.

"Our objective is to encourage banks to continue to fund their corporate clients by purchasing their debt securities, given the confidence that these securities can be funded by exchanging them with us for cash. 

"By banking the banks, we are ensuring large businesses can better manage their cash flows and lower their funding costs," Hawkesby said.

Calling the move "another step forward", Kiwibank chief economist Jarrod Kerr said that with around $21b in the system - compared to around $7b normally - there's plenty of liquidity in the market.

What the repurchase means is that banks can take corporate bonds that they own to the Reserve Bank and exchange them for cash.

"This is a way of temporarily relieving banks of certain assets if needed, in exchange for cash," Kerr explained.

The repurchase programme is expected to provide liquidity for bonds that may have struggled to trade in the open market, giving banks confidence that corporate bonds can be exchanged for cash if needed.

"It should also provide the corporate with some confidence that there will still be bank demand for their bonds going forward," Kerr added.

Following the COVID-19 outbreak, the Reserve Bank introduced several tools to improve liquidity. These include bank access to term funding, funding in foreign exchange swap markets, a temporary US dollar swap-line and a large-scale New Zealand government bond buy-up that will drive interest rates lower.

 The central bank says it will continue to follow market developments and is poised to take more action if needed to support stability and efficiency in New Zealand's financial system.