The Reserve Bank Bulletin is always an interesting read. The June issue delivers with “The last financial cycle and the case for macroprudential intervention” by Chris Hunt.
I like Reserve Bank publications for the awesome charts they produce. In this piece they try and apply the policies they’re suggesting to the 2001 – 2008 boom.
Look at the massive reduction in private sector credit growth to business – how much of that is due to finance company failures and risk aversion on the part of bankers? It also seems like agricultural credit growth ground to a halt as we saw over-extended farmers like the Crafars have their loans called in.
OK – so if you are on a floating rate mortgage, that you can only afford when interest rates are low, what happens to your debt servicing ability when interest rates rise? Bueller? Bueller?
Finance companies competed aggressively in the property development sector, lending on more marginal and riskier housing projects which ultimately sowed the seeds of failures within the sector from 2006.
OK. So with massive population growth and supply side restrictions on housing, who shall fund the supply-side response? What constitutes a “marginal and riskier housing project” when New Zealand is not building enough houses each year even to keep up with population growth and reduced family formation?
There are some big questions that don’t appear here – how do we compensate society if our macro-prudential intervention chokes an economic recovery before it even gets started? Do we include the costs of subdivisions not built or higher rents paid for apartments when marginal apartment building projects can’t get approved because of higher capital requirements in the financial sector?
There is a trade-off between lending and meeting Basel III requirements. There hasn’t been nearly enough discussion of how Basel III by itself could kill any credit financed recovery (household risk preferences won’t pay for it!).
OK so here the author is highlighting the gap between actual capital ratio and what any counter-cyclical buffer would have been to put a dampener on credit growth starting late 2005 – if the RBNZ had possessed such powers.
- Where would financial institutions raise additional capital from if their regulating central bank has just taken action to force them to raise additional capital or substantially reduce their loan book?
- Where would non-bank deposit takers be in this situation? How can the Reserve Bank stay ahead of alternative credit providers?
If there is one thing we can be grateful for when it comes to the Reserve Bank, it’s that you can read their bulletins regularly and develop a pretty good idea of where monetary policy and prudential regulation are headed.
They are transparent – so when I see criticism of “shadowy central bankers” it’s clear that someone hasn’t spent time on the recently redesigned Reserve Bank website.
All of this stuff affects you and your finances – particularly if you have a mortgage – so there’s no excuse not to read through this stuff when it’s available for free.