By Gareth Vaughan
The Reserve Bank says only a small number of macro-prudential tools could play a role in boosting New Zealand's financial stability, and their use should be limited to periods of exceptional financial imbalances such as unusually strong credit growth and asset prices.
The central bank’s comments, in its November Financial Stability report out yesterday, come with the G-20 expected to rubber stamp proposed global banking regulatory reforms, the so-called Basel III put together in the wake of the global financial crisis, at this week’s meeting in Seoul.
In the stability report Governor Alan Bollard reiterated that the Reserve Bank generally supports the new global standards but will fully assess their potential impact on the financial system before initiating any changes to the New Zealand supervisory framework. The Basel III proposals include requirements for banks to increase stable funding and liquid asset holdings.
The Reserve Bank says that although a large number of macro-prudential tools are under discussion internationally, it believes only a relatively small number of tools could have a future role in New Zealand.
“These include adjustments to the core funding ratio (CFR), the use of counter-cyclical capital requirements broadly along the lines of the Basel III proposals, adjustments to capital risk weights for particular sectors, and measures targeted specifically at the housing market such as restrictions on loan-to-value ratios.”
Introduced on April 1, the CFR sets out that banks must obtain at least 65% of their funding from retail deposits or wholesale sources of more than 12 months duration. In the stability report, the Reserve Bank says it plans to lift the CFR to 75% over the next two years, a slightly later timeframe than its previous guidance of lifting the CFR to 75% by mid-2012.
Meanwhile, the central bank says in principle macro-prudential tools can help promote financial stability in two ways; Instruments such as capital or funding requirements can help to build financial system resilience by increasing financial buffers available to financial institutions to absorb shocks. Or some macro-prudential tools may also directly influence the credit cycle, generally by their effect on the price or availability of credit, thereby dampening down the build-up of financial system risk due to excessive credit growth.
“However, considerable caution is needed in respect of the effectiveness of macro-prudential tools, especially their capacity to directly influence the credit cycle,” the Reserve Bank says. “Most tools have not been used widely in other countries and there is considerable debate about how well they might work.”
The central bank’s own analysis suggests the effectiveness of some tools on constraining credit growth could vary considerably depending on global financial market conditions.
“For example, raising capital or core funding requirements may be of limited effectiveness in constraining credit growth in an environment in which the cost of capital or funding was cheap.”
“However, use of such tools could still be appropriate to build the future resilience of the financial system.”
The Reserve Bank says it envisages a “horses for courses” approach to macro-prudential tool use. Given this, it’s unlikely it’ll ever be feasible to devise fixed policy rules for assorted macro-prudential instruments. Instead, it would be a case of choosing the right policy tool for the right occasion.
“Overall, we believe that if New Zealand were to deploy macro-prudential instruments in the future, their use is likely to be best limited to periods of exceptional financial imbalances, such as unusually strong credit growth and asset prices,” the Reserve Bank says.
“This appears to be broadly in line with the intention of the Basel III proposal for counter-cyclical capital requirements, which the Basel Committee on Banking Supervision envisage might be applied infrequently in most jurisdictions, perhaps just once every 10 to 20 years.”
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12 Comments
I like the words, but aren't these the same people who didn't effectively use the one tool they have, when they should have?
Tools are one aspect of the problem, I'm all for em', but they need new targets and to be held accountable for their judgement and timing.
If only we had leaders and government who could, and were willing to properly govern these people.
The core funding , min deposit 'tools' are the same ones thu under 21st Century names that where removed from the RB in the early 1990s....
Funny how once these where removed the market was 'stimulated' from Rather static period....which historically rolls over every 6 or 7 yrs....with or without the regulations.
And without these regulations, how this time round the market went out of control....ineffect banks lending savings ratios getting out of traditional stable parameters and those who showed no ability to save handed out 100+ % loans they could not afford
From memory it was the RB that objected to these tools being removed and actually predicted what would happen.....which results in them getting flack for what ever they do to clean the mess up , even today.
I point to ponder...IF these regulations have been left by the pollies.....would there have been far more investment in industry over the last 16 odd yrs?
Would the international crisis hit us as hard?
Would we be on a far better wage/income parity with Aussie?
Would the housing market be as depressed as it is...rather than just in a historical cyclic static period with signs of starting to move again about now.
Bottom line, the pollies had their own agenda.....didnt do their homework (again) Dropped the RB right in it...and retired off to cushy jobs in the UN and company directors leaving the citizens who's interest they where meant to look after holding the bag.
All other things being equal it is funny how developers never see a connnection between immigration and house prices (or at least a perception of a potentially unlimited supply of rich migrants). If they do it isn't an issue just free up all that old (floodplain) land lying about. The immigrants often buy a better that average house and drive a taxi or have a little tour business. But (for example):
"Critics of the Australian immigration program will warn that the housing crisis is a sign that Australia is struggling to cope with a rapidly growing population. Whilst others blame a demand and supply mismatch in the housing market.
City dwellings are amongst the most expensive in Australia because of high demand. Just a few months ago we reported on the trend of expensive suburban properties being snapped up by wealthy Chinese parents keen to give their children an Australian education. So widespread was the practice in cities like Sydney and Melbourne that new estate agents started popping up to offer their services for these buyers only."
http://www.embraceaustralia.com/rising-house-prices-in-australia-mean-t…
I'm don't think the land tax idea was destroyed by argument, more a matter of capital gains (not) going into vested interests coffers.
When Don Brash was governor of the RBNZ, he commented most acutely once that the RBNZ ALSO needed some say in the rate that land was released for development by councils, otherwise their OCR tool was rendered impotent. Owen McShane deserves credit for writing the report for the RBNZ back then that predicted all this trouble we are now in.
It is indeed a tragedy for NZ that Don Brash did not become PM in either 2005 or 2008. In fact, I would even have preferred an ideologically uncompromised National Government to finally come to office not until 2011, after Helen Clark had had a full 12 years to actually prove for once and for all what a dismal failure socialism is. As things stand, the public has no idea, and no hope of getting any idea either.
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