So that makes it six finance companies in 15 months. What does this mean for the NZ credit market?
NZ banks should not be significantly effected. Banks are in relatively good shape, and all the recent trouble in secondary, non-bank financial institutes, is likely to increase demand for low yielding, low risk bank products.
However, non-bank financial institutions are going to have one hell of a time trying to find funds in the current tight credit market. The failure of so many finance companies is likely to make thing more difficult for them, by increasing investors level of risk aversion. Without a steady stream of deposits, some efficient and well managed finance companies are going to be flushed down the toilet. That is what happened to Property Finance.
My concern is that this may make it difficult for firms to borrow money. NZ currently has a tight labour market, and NZ firms are making low margins. In this sort of situation, firms are unwilling to remove staff, and as a result need to borrow to stay afloat. Now, something will have to give, either the flow in the credit market will improve, unemployment will creep up, or firms will be run into the ground. Only time will tell I guess.
Update: A couple of finance companies say they are feeling good. They expect regulation to occur, but how should we regulate the non-bank financial sector?
Update II: So Five star consumer finance has gone under. Guess it wasn’t really five star . Look I’m an economist with no sense of humor I just had to say it. But it didn’t deserve a new post, as the company was small and not that exciting. It might scare people, but I suspect it was just dead wood.