The Reserve Bank has finally acknowledged it must review its controversial 2019 bank capital decision requiring large banks to increase their capital reserves from 10.5% to 18% by 2028. The timing is revealing. It came on former Governor Adrian Orr’s final day as Governor, just four weeks after his shock resignation.The Reserve Bank has finally acknowledged it must review its controversial 2019 bank capital decision requiring large banks to increase their capital reserves from 10.5% to 18% by 2028. The timing is revealing. It came on former Governor Adrian Orr’s final day as Governor, just four weeks after his shock resignation.
Critics – including some of us at the Initiative – have longstanding concerns that the capital rules may be too conservative. The RBNZ itself has conceded they would increase lending costs and reduce GDP by up to 0.32% annually. Independent analysts put the latter figure closer to 1%, which would cost our economy up to $4 billion each year.
S&P Global described the RBNZ’s capital requirements as “some of the toughest worldwide,” warning they could force banks to cut loans to smaller businesses. This risk is now becoming a reality.
Finance Minister Nicola Willis has diplomatically welcomed the review. Her approach has merit. Having the RBNZ voluntarily review its own decision preserves institutional credibility.
Yet Willis holds an iron fist within her velvet glove.
Unlike monetary policy, prudential regulation is subject to close political oversight – as it should be. Governments typically set regulatory policies, leaving independent regulators to implement them. The Reserve Bank of New Zealand Act’s prudential regulatory provisions reflect this approach.
The Financial Policy Remit (FPR) mechanism in section 49 of the Act permits the Finance Minister to specify matters the RBNZ board “must” consider when setting financial stability policies.
Willis could direct the board to align with international bank capital norms or to guard against a one-in-100-year risk of bank failure rather than the internationally-unique one-in-200-year risk behind the controversial bank capital decision.
The New Zealand Initiative’s submission to Parliament’s Finance and Expenditure Committee documented flaws in the RBNZ’s 2019 decision-making process. The RBNZ conducted a cost-benefit analysis only after announcing its decision – and used questionable assumptions to justify its position. A proper reassessment is long overdue.
Parliament created the FPR mechanism to ensure democratic oversight of decisions with far-reaching economic impacts. If the review fails to address these core concerns, Willis can bring New Zealand’s capital requirements into line with international norms.
Banking stability matters, but so does economic growth. Without a statutory requirement to balance these objectives, the RBNZ may have prioritised stability over efficiency. A self-initiated review is the right starting point. But if necessary, Willis should not hesitate to bring bank capital rules into line.
Critics – including some of us at The Initiative – have raised longstanding concerns that the capital rules may be too conservative. Even the RBNZ conceded they would increase lending costs and reduce GDP by up to 0.32% annually. Independent analysts put the latter figure closer to 1%, which would cost our economy up to $4 billion each year.
S&P Global described the RBNZ’s capital requirements as “some of the toughest worldwide,” warning they could force banks to cut loans to smaller businesses. This risk is now becoming a reality.
Finance Minister Nicola Willis has diplomatically welcomed the review. Her approach has merit. Having the RBNZ voluntarily review its own decision preserves institutional credibility.
Yet Willis holds an iron fist within her velvet glove.
Unlike monetary policy, prudential regulation is subject to close political oversight – as it should be. Governments typically set regulatory policies, leaving independent regulators to enforce them. The Reserve Bank of New Zealand Act’s prudential regulatory provisions reflect this approach.
The Financial Policy Remit (FPR) mechanism in section 49 of the Act permits the Finance Minister to specify matters the RBNZ board “must” have regard to when setting financial stability policies.
Willis could direct the board to consider international bank capital norms or direct the board to guard for a one-in-100-year risk of bank failure rather than the novel one-in-200-year risk behind the controversial bank capital decision.
The New Zealand Initiative’s submission to Parliament’s Finance and Expenditure Committee documented flaws in the RBNZ’s 2019 decision-making process. The RBNZ conducted a cost-benefit analysis only after announcing its decision – and used questionable assumptions to justify its position. A proper reassessment is long overdue.
Parliament created the FPR mechanism to ensure democratic oversight of decisions with such far-reaching economic impacts. If the review fails to address these core concerns, Willis has the authority to bring New Zealand’s capital requirements into line with international norms.
Banking stability matters, but so does economic growth. Without a statutory requirement to balance these objectives, the RBNZ may have prioritised stability over efficiency. A self-initiated review is the right starting point. But, if necessary, Willis should not hesitate to bring bank capital rules into line.