BNZ economists describe Govt plans to influence bank lending as a "surprise" but say judgement will have to wait until further details are revealed

BNZ economists say the government’s plans to have more say in financial regulation - as indicated last week - will be important for the markets to monitor.

In announcing plans for the long anticipated deposit insurance scheme and the Deposit Takers Bill last week Finance Minister Grant Robertson said the reforms would include a new process for setting lending restrictions, such as loan-to-valuation (LVR) ratio restrictions. 

“This will give the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict. The Reserve Bank will then have full discretion to decide which instrument is best suited to use and how the restrictions are applied,” Robertson said.

In the weekly BNZ Markets Outlook publication BNZ senior economist Craig Ebert describes the Government's announced plans to influence bank lending as a "surprise".

"The government’s plans to have more say in financial regulation will be important for the markets to monitor," Ebert says.

"However, judgement will have to wait until the details are, firstly, revealed and then confirmed in legislation."

He estimates this could take "at least a couple of years", going by currently proposed timelines.

"To the extent this agenda is another directed at the recently-heated housing market, we would note the housing market could look and feel quite different by the time the new Deposit Takers Bill is enacted – namely 2023 by the look of it."

Regarding the Bill’s proposed introduction of a deposit insurance scheme for New Zealand, the $100,000 threshold is "much bigger" than the $50,000 previously indicated, he notes.

"What’s more, it would apply to every amount an individual has with each deposit-taking institution, rather than $100,000 as a maximum per individual."

Ebert says by its name and proposed thresholds, the deposit insurance scheme "sounds very reassuring".

"However, it also increases the moral hazard of people dispersing funds across a wide range of deposit-taking institutions – some with naturally higher risk characteristics – knowing the taxpayer will bail them out if/when things turn sour.

"Of course, any insurance scheme involves direct costs in the form of premiums, which will presumably be paid on an ongoing basis by all deposit-taking institutions."

While it will take time to judge the impact of the Deposit Takers Bill/Act, Ebert says it’s an added reason to tune into next week’s six-monthly Reserve Bank Financial Stability Report (FSR), (on Wednesday, May 5) for "any light the Bank might shed on it".

"The FSR was already shaping up to be interesting enough, given the recent housing policy announcements by the government, and the lingering issue of whether the RBNZ might have anything more to say (and do?) with respect to restrictions put upon housing 'investors'," Ebert says.