RBNZ invokes 'effective' track record to counter reformers

George Lekakis Finance regulation

A review of lending restrictions introduced six years ago by the Reserve Bank of New Zealand has found they have been effective in constraining excessive growth in property prices and household debt.

The upbeat evaluation, undertaken by New Zealand Treasury analyst Bruce Lu, comes at a sensitive moment for the RBNZ as a growing chorus of academics and policymakers call for devolution of some of the central bank’s powers.

While most other OECD economies have been stripping the prudential powers of central banks since the turn of the millennium, the RBNZ is one of the few that retains supervision of the financial services system as a core function.

Australia was one of the first countries to pluck prudential supervision from its central bank’s mandate after the 1997 Wallis Inquiry recommended the formation of APRA.
The RBNZ, somewhat controversially, is now actively advancing arguments aimed at thwarting similar reforms in New Zealand.

Lu’s glowing evaluation of the central bank’s macroprudential measures since 2013 was cited by the RBNZ on Wednesday as evidence supporting the retention of the current mandate.

In a press statement accompanying the release of the evaluation, RBNZ deputy governor Geoff Bascand left no-one guessing what his board thought about moves to dismantle the central bank’s powers.

“Mr Bascand said the Reserve Bank believes that it should retain the ability to use macroprudential policies, supported by clear and transparent communication of how they can be used,” the bank said in the media release.

Notwithstanding the dubious virtue of a taxpayer-funded agency actively campaigning to retain its statutory powers,  Bascand is probably justified in his assertion that the RBNZ’s macroprudential measures have been effective.

The RBNZ introduced lending restrictions several years before APRA in Australia and also appears to have acted in a timelier manner to ease them.

The RBNZ first imposed lending restrictions on Kiwi banks in October 2013 when it put a ten per cent ceiling on all new lending with loan-to-value-ratios of more than 80 per cent.

In 2015, the crackdown was extended to include measures aimed at slowing the growth of investment lending in the residential mortgage market.

Since January last year these restrictions have been progressively eased.

Lu found that the RBNZ measures had been extremely effective in supporting financial stability.

“By mitigating the scale of house price falls during a potential downturn, and limiting the indebtedness of households, the policy has made the financial system more resilient to a housing-led downturn,” Lu wrote in his report.

Apart from subtracting the prudential powers from the RBNZ’s mandate, reformers are also calling on Kiwi lawmakers to rein in the powers of the central bank’s governor.

It is argued that the powers vested in the governor are disproportionate compared to peers in other countries and not compatible with modern corporate governance principles.