Reserve Bank deputy governor Christian Hawkesby says financial inclusion will be considered when overseeing incoming deposit takers legislation

Financial inclusion can contribute to financial stability and will be a consideration when applying new deposit takers regulation, the deputy governor of the Reserve Bank of New Zealand (RBNZ) says. 

In a speech to the Institute of Directors in Canterbury on Friday, RBNZ deputy governor Christian Hawkesby said inclusion and stability were interconnected.

“A well functioning financial system with low probability of insurers and deposit-takers getting into trouble increases the likelihood that people can access, and have trust in, the products and services they rely on,” he said.

Credit access and the range of options available to customers would be limited if financial firms were to collapse in an unstable environment. 

The flipside of the same coin was that more inclusion could also make the sector more stable. 

“Providing financial services to a larger customer base can promote a higher share of customer deposit funding, contributing to stability,” he said.

Encouraging entities to do different types of lending, such as to smaller firms, could help to diversify asset portfolios and reduce the relative size of any single borrower. 

The Reserve Bank said a review of 2,600 banks in 86 countries found a higher level of inclusion contributes to greater bank stability. 

Stable inclusion 

The speech was based on an excerpt from the central bank’s May Financial Stability Report which was pre-released ahead of its May 3 full release.

In the excerpt, the RBNZ noted there was “ambiguity” about the strength of the relationship between inclusion and stability.

“There are instances where increasing inclusion can negatively impact stability, for example, extending access to credit for marginal borrowers could result in financial institutions taking on a greater degree of risk as seen during the subprime mortgage crisis in the United States.”

It also used the collapse of finance companies, such as South Canterbury Finance, to highlight how inclusivity can pose a risk to stability if lending standards were not strong enough. 

This is relevant to the Deposit Takers Bill, which includes a deposit insurance scheme that's currently before Parliament, which will expand the Reserve Bank’s regulatory tools.

A select committee report recently recommended the bill be amended to protect the diversity of financial entities and require the RBNZ to consider softer lending standards for some firms.

 The Reserve Bank said there were three important factors for optimizing inclusion and stability: the types of products and services affected, the size and scale of affected groups, and whether inclusion efforts could lead to a reduction in lending standards.

“Under the new upcoming Deposit-Takers legislation, we will think carefully about creating rules that are appropriate to the characteristics and soundness of deposit-taking entities.”

The pre-released excerpt suggested there would be further discussion of this issue in Chapter 3 of the May Financial Stability report. 

Hawkesby’s speech also discussed work that was underway to improve Māori access to capital. The central bank released an issues paper in 2022 which highlighted barriers that Māori firms face when seeking finance. 

It was now working with retail banks to develop ways to lend against communally-owned Māori land and to collect more data related to Māori access to capital. 

Pause for suspense 

While the speech mostly steered clear of monetary policy, there was arguably a dovish tone to the few remarks he did make. 

Hawkesby repeated a line from the Monetary Policy Review, saying that both domestic and global inflation was “too high and persistent,” and reiterated three key points from the review. 

First, that the full impact of tighter policy hadn’t yet been fully felt. Secondly, there were signs that economic growth was beginning to slow. And finally, the extent of this slowdown would determine “the direction of future monetary policy.”  

None of these remarks were a departure from what was said in the April review, but were among the lines that raised the possibility the central bank could forgo a final interest rate increase in May. 

In the context of the below-forecast inflation data release on Thursday, it could be interpreted as a slightly softer take on future policy. 

Financial markets and most economists believe the Official Cash Rate will be lifted 25 basis points to 5.50% in the May Monetary Policy Statement.