Review of the Reserve Bank Act - Phase 2

In-principle decisions and follow-up question on: The role of the Reserve Bank and how it should be governed

We agree with the Minister of Finance’s in-principle decision to keep responsibility for prudential regulation with the Reserve Bank. New Zealand’s system does not have the size nor complexity requiring the splitting of prudential regulation from monetary policy setting.

We support the Minister’s in-principle decision to give the Reserve Bank a single high-level objective to ‘Protect and enhance the stability of New Zealand’s financial system’. A sole objective is the simplest way of ensuring the Bank focuses on those factors it can control within its field of expertise. Climate change should not be addressed through additional Bank objectives – not because climate change is not
important, but because it is primarily addressed through specific legislation.

In terms of monitoring the Reserve Bank’s performance, we agree with the Minister’s decision to make Treasury the monitoring agent, replacing the existing Reserve Bank Board. We hope this closer alignment extends to better coordination between the two entities making and reviewing policies that affect the New Zealand economy.

We disagree with the Minister’s decision to pursue a deposit insurance scheme for New Zealand banks. The evidence points against his conclusion, and the paper itself notes that “the Independent Expert Advisory Panel … asked for more information to assess the net benefits of depositor protection”.
Consumers will bear such insurance costs through reduced interest returns on their deposits in an already low interest rate environment. Also, some of the costs will be passed through to borrowers in the form of higher interest rates. The paper admits these “costs could be significant”. Other policy changes, such as increasing banks’ cost of capital through the Reserve Bank’s capital review process, could compound upward pressure on interest rates. New Zealand already pays a premium for credit due to our relatively small size. Imposing compounding costs on top of that, even if each increment is viewed as insignificant, creates a cumulative cost born by the New Zealand economy through lower economic growth, impacting
everyone's well-being.

The Reserve Bank's role in financial policy: tools, powers, and approach

The governance of macro-prudential decision-making on policies and tools requires a higher level of input and collaboration from the rest of Government. While the Reserve Bank’s independence on monetary policy settings is undisputed, this independence should not extend to tangential responsibilities such as macro-prudential settings. Such policies will have broad economic and societal trade-offs requiring examination and will interact with policy-making in other departments, requiring coordination. Examination and coordination can occur only if the Reserve Bank is obliged to participate as a regular policy-making government department, rather than leaning heavily on its independence, as it has historically. Referring to the paper’s ‘Figure 2B’, we recommend moving the governance options to the right, at least to options 2 or 3...

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