The Minister of Finance is poised to gain new powers over bank lending, with economists warning the surprise move challenges the Reserve Bank’s independence.
On Thursday the Government revealed decisions on a long-signalled deposit insurance scheme, which will see depositors’ savings of up to $100,000 in any bank guaranteed in the event the institution fails, funded from levies on deposits.
The news also revealed that Cabinet had agreed to create “a new process” for setting lending restrictions, such as the loan-to-value ratios which restrict how much banks can lend to homeowners with small deposits.
“This will give the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict,” Robertson said, adding that the central bank would have discretion to decide which tools should be used and how they were applied.
As well as setting the Official Cash Rate, the Reserve Bank regulates banks and insurers with a view to maintaining a sound financial system, through which it sets rules around how banks can lend to various sectors.
So far the Government has given little detail about how the powers would be used, other than that the Deposit Takers Bill will propose allowing the Minister of Finance to make regulations on bank lending standards.
“This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives,” information released by Robertson’s office said.
The move caught the banking sector by surprise, with several economists warning it challenged the Reserve Bank’s independence and blurred its responsibilities for maintaining a sound financial system with the objectives of the Government of the day.
“If the Government wants to make policy changes it has every other lever available to it. If it needs to use an independent body to execute its policy goals, it’s too scared of using its own levers,” Brad Olsen, a director at economics consultancy Infometrics, said.
“There is, in my mind, increasingly overt moves for the Government to dictate what it wants the independent Reserve Bank to do.”
Cameron Bagrie, a former chief economist at ANZ, said the move could undermine the Reserve Bank’s operational independence.
“The Reserve Bank has got a financial stability objective. If you get the Minister of Finance or other entities wading in on who you can lend to and who you can’t, suddenly the financial stability objective becomes somewhat secondary to a political one.”
National’s finance spokesman Andrew Bayly called on the Government to release the Cabinet paper and provide details about how the powers could be used, to “reassure the country that he will not be giving himself the power to intervene in commercial banking”, rather than simply mention the new powers in passing.
Deposits of up to $100,000 per institution will be guaranteed in the event of a bank collapse, the Government announced on Thursday.
As part of a long-term review of the Reserve Bank of New Zealand, the Government proposed protecting deposits of up to $50,000 in each failed bank, but Robertson said it had raised the amount as a result of feedback.
“Taken together, the recommendations will considerably strengthen New Zealand’s financial system safety net and contribute to a robust framework of protections for depositors. It also brings our protections into line with those in place overseas,” Robertson said. The move would guarantee 93 per cent of depositors, he said.
Surveys have shown that most bank customers already believe deposits carry a government guarantee, while some surveys have warned that creating a guarantee will increase risk-taking by the banks.
“Deposit insurance puts New Zealand taxpayers on the hook for banks’ risk-taking and increases instability in our financial system,” Act leader David Seymour said.
“It creates a moral hazard, that is banks and savers will take bigger risks because they’re insured.”
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