Short-Term Money Market’s Teething Troubles

Press, Volume CI, Issue 29900, 14 August 1962, Page 20

Short-Term Money Market’s Teething Troubles

(By Our Commercial Kditor)

WELLINGTON, August 11. Nearly 20 years ago a Wellington local body raised a loan by a public debenture issue and then found it did not need the money for several months. The secretary telephoned a local sharebroker and offered him the use of the money until it was required. The sharebroker lent the money to another local body which was about to raise a loan, but needed money urgently. When this local body raised its loan it repaid the sharebroker, who repaid the first local body. In this way New Zealand’s short-term money market—given official recognition in the Budget this year —was born. It grew slowly, until local bodies throughout New Zealand as well as many business firms were enabled to lend and borrow substantial sums for periods as short as one day. When Mr Lake announced in his Budget this year that the Government would establish an official shortterm money market he put the official stamp on an institution which had been in existence for many years; but the rules laid down by the Government differ in several important respects from the practice of the unofficial market.

The most significant is the requirement that approved dealers (of which there are three at the moment) must hold 95 per cent, of their portfolios in short-dated Government securities. Dealers in the unofficial market have held local body debentures, as well as Government stock, as security for their borrowing. Sales of Stock

Since the establishment of the official market dealers have been able to buy Government stock direct from the Reserve Bank. This stock carries interest at rates varying according to the date of maturity (one-, two- or three-year) and the dealer borrows at shorter terms from his clients. With the money market as intermediary, the Government is. in effect, borrowing from the dealers’ clients Dealers this week were offering 38 per cent, or 3? per cent, to their clients tor deposits at call. The Reserve Bank has issued stock to dealers at 4J per cent, tor two-year stock. with a slightly lower rate for shorter dates and a slightly higher rate for longer dates.

The margin of I per cent to % per cent, between the dealer’s borrowing and lending rates (and the rates quoted above were typical for this week’s transactions) is the dealer's profit. This is

gross profit, not net. for the dealer has heavy overhead expenses. According to one authority, a margin of 1 per cent, is necessary to ensure a reasonable net profit, and the current margin will need to widen. As the Reserve Bank rate is not expected to alter in the near future, a drop in the dealers’ borrowing rates is predicted. The “95 per cent Government stock" requirement for dealers’ portfolios virtually rules out local body financing for the money market. This function will in future be carried out by the National Provident Fund. Bank as Backstop Another consequence of official recognition of the market is the role assigned to the Reserve Bank as “lender of last resort.” It too many of a dealer’s clients ask for repayment of their call deposits at the same time he may be "caught short." Rather than sell part of his portfolio of Government stock at a loss, he would borrow from the Reserve Bank. The bank discourages this practice by fixing a high interest charge—7 per cent.— and the dealers will seldom resort to it. But, as with the trading banks, it is reassuring both for the dealers and their clients to have the Reserve Bank behind them.

Official recognition has attracted more money into the market. One dealer estimated this week that the combined portfolios of all the dealers had risen from some £lsm to £lBm since the end of June. The clientele of the shortterm money market now comprises most of the country’s leading financial, and commercial houses. They' include insurance companies, stock and station agents, dairy companies, sharebrokers. retailers and finance companies. They fall mainly into two categories: those whose operations are characterised by a seasonable ebb and flow of funds, and those which usually have temporary large cash surpluses.

There is one notable omission from this list of shortterm money market customers: the trading banks It would be very convenient tor a bank to be able to use the facilities of the market, but at present the New Zealand trading banks are barred from the market In Australia the major trading banks supply some 30 per cent of the funds held by dealers Permission for them to operate on the New Zealand market would undoubtedly stiffen the competition among the dealers At present they are losing deposits to the money market and (as the chairman of

the New Zealand Bankers’ Association points out in the accompanying report) they are prevented by interest rate restrictions from retailing. This friction between the trading banks and the shortterm money market is the main teething trouble of the newly-recognised market. It will need to be attended to promptly if the market is to develop along sound lines But, provided these early difficulties are overcome, the market should continue to expand and serve a useful purpose to New Zealand commerce and Government