Experts urge action to quell investor panic
massey-university
Fri Aug 31 2007 12:00:00 GMT+1200 (New Zealand Standard Time)
Experts urge action to quell investor panic
Friday, 31 August 2007, 3:48 pm
Press Release: Massey University
Friday, August 31, 2007
Finance experts urge action to quell investor panic
Massey finance researchers are urging the Government or the Reserve Bank to act quickly to restore investor confidence and halt the contagion-like run of collapsing finance companies.
Dr Chris Malone, from the College of Business’s Department of Finance, Property and Banking, says a failure to quell investors’ fears and help remaining financial institutions survive could lead to negative impacts on other sectors.
The head of the University’s Centre for Banking Studies, Dr David Tripe, is also predicting that investor panic could get worse and the domino effect could have a wider economic impact on the supply of credit.
Dr Tripe says New Zealanders need to become more sophisticated about their savings and investment decisions.
“There is a danger in mixing all sorts of financial institutions together, and banks are not perfect. If everyone starts to panic, the pressure very quickly goes on otherwise solvent companies as they face demands for repayment of deposits.
“This potentially cuts some supplies of credit and although the finance companies are not the biggest players in the market they are important for the funding of second-hand cars and hire purchase agreements for retailers.”
He says to break the “circuit of panic” the Reserve Bank could be given the power to extend some lender of last resort facility to finance companies.
“Companies could present the central bank with quality loans and ask for, say, a 60 per cent advance on that loan immediately. A central authority could also offer, on a temporary basis, to guarantee 90 per cent of all finance company deposits of up to $100,000 to halt panic among small and medium investors.”
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Dr Malone says the situation has developed into a classic “lemons” market, where investors find it hard to distinguish the good from the bad. “In that scenario the whole market can fail unless a monetary authority intervenes and provides liquidity. That help needs to be directed at the lower investment grade end of the market.”
“The area of financial contagion is very high on the research agenda of monetary authorities at present. In a sense, it is one of the greatest contributions our discipline can make to society, if it helps us understand how to alleviate and avoid financial contagion.”
Dr Malone says monetary authorities are increasingly involved in managing and supporting investor confidence, with beneficial results. “So it seems strange that the Government appears to think the current situation is acceptable. In a credit crunch, there is a strong reason to act. The worst-case scenario is not worth contemplating.”
Seven finance companies have failed in the past 16 months, including three in the past eight days, raising fears that investor fear will see even robust and otherwise healthy companies start to collapse. The investment market is now calling for compulsory credit ratings and some sort of supervision to lift falling confidence in finance companies.
ENDS
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