MNI: RBNZ Set For Governance Shift After Banking Inquiry

MNI (SYDNEY) - The New Zealand government is likely to reform the Reserve Bank of New Zealand’s macro-prudential and governance arrangements, leading to cheaper loans and looser capital requirements, following the conclusion of a far-reaching banking competition review, economists and former RBNZ officials have told MNI. 

Prudential changes and adjustments to bank capital rules, some of the most stringent in the world, would have a measurable impact on the cost of credit and GDP growth, said Roger Partridge, chair of think tank the New Zealand Initiative. “I think there will be quite the appetite to address that,” he said, pointing to the government’s recently-closed inquiry into banking-sector competition. 

“Improving the performance of the New Zealand economy is [the government]’s number one objective and it will come from a lot of small tweaks.” 

The nation's four largest lenders currently must hold capital equal to at least 18% of risk-weighted assets, while smaller banks must hold a minimum of 16%, double that of European banks and significantly higher than in Australia. The rules, implemented in 2022, have been criticised for constraining credit to less risker lending. 

The Finance and Expenditure Committee conducted the review, which closed last week, following a report in March by the Commerce Commission that found a lack of competition and a focus on profit margins had resulted in under-investment in technology and low levels of innovation in the banking sector. The committee is expected to hand down recommendations to parliament over the coming months. 

CAPITAL REQUIREMENTS

Geoff Mortlock, financial consultant and former financial stability advisor at the RBNZ, said the inquiry's findings will lead to lower capital requirements. Mortlock had urged the government to make far reaching changes to the RBNZ’s governance, the performance of the board and senior management. 

“Which I think is fundamentally lacking, but also lifting the performance metrics for other government agencies, which are sadly lacking, and concerns about the direction of macro-prudential policy, the excessive level of capital ratios and the distortions that's having on the lending market must be addressed.” 

RBNZ GOVERNANCE

The Reserve could lose it prudential powers altogether, along the lines of the Australian system, or a separate committee could be created to oversee banks, following the model of the Bank of England’s Prudential Regulation Authority, Partridge suggested, noting the current system sees the board, meant to be a check, vesting prudential power into the governor.

“Of course, that depends on having sufficient expertise on the Reserve board to exercise effective governance over the exercise of the powers,” he said, noting the present board sorely lacked prudential experience. “It’s very hard for them to hold the prudential regulatory team at the Reserve Bank and the governor to account for the exercise of their prudential regulatory powers.”

Partridge said the government could add greater prudential regulatory experience on the board, which would represent a simpler reform.