MNI 5 Things:RBNZ Spencer Calls For Long-Term Macro-Pru Policy

By Sophia Rodrigues

     SYDNEY (MNI) - The following are the five key observations we made from the

Reserve Bank of New Zealand governor Grant Spencer's speech Tuesday. Spencer

spoke on, "Getting the best out of macro-prudential policy."

     --Spencer said macro-prudential policy has been useful in the current

environment of globally low interest rates and that given its benefits, there is

a need to develop it as a credible and sustainable policy over the longer-term. 

     --Spencer said that while the Loan-to-Value mortgage restrictions were

started as a temporary measure in 2013, there is now a case to consider

maintaining a policy infrastructure of this sort, with policies being adjusted

through time between binding and non-binding settings. This would be  similar to

the 'insurance' approach adopted by the Bank of England where a loan to income

ceiling has been set at a non-binding level, he said.

     --Spencer noted that Core Funding Ratio is an existing micro-prudential

policy instrument which  currently requires banks to have at least 75% of their

funding in "core" instruments such as retail deposits. This could easily and

usefully be activated as a macro-prudential tool in response to an increase in

system-wide liquidity risk. Spencer also said the Sectoral Capital Ratio (SCR)

which has not been used to date, would seem a potentially useful additional

buffer against increasing risk in a particular sector such as housing or dairy.

     --Spencer said in the upcoming review of macro-prudential policy and the

Reserve Bank Act, it is also important to allow for the differences between

micro and macro-prudential policy. According to him, macro-prudential policy has

two differentiating characteristics: it only addresses significant systemic

shocks, not idiosyncratic day-to-day shocks; and it has a stabilisation role

(albeit a secondary one) as it seeks to moderate cyclical extremes in credit

growth and asset prices.

     --Spencer made a case for a financial policy committee (FPC) for decisions

relating to both micro and macro prudential policy in line with the planned

introduction of a new decision making committee for monetary policy. The Reserve

Bank has supported a two-committee (MPC/FPC) model in place of the current

single Governing Committee, for example in the Bank's 2017 "Briefing for

Incoming Minister," he said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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