Greater powers for the Finance Minister to restrict lending could reduce confidence in the Reserve Bank, blur lines of accountability, and lead to inconsistent decision-making, Grant Robertson concedes.
But he says it is justifiable because the Government needs more tools in order to deliver electoral promises and impact “distributional trade-offs or societal preferences” – such as in the housing market.
The pros and cons of the Finance Minister determining the types of lending the Reserve Bank can restrict are outlined in a series of Cabinet papers about a proposed framework – which Robertson unveiled on Thursday – for regulating deposit-takers.
The framework would see the Reserve Bank regulate licenced deposit-takers – including banks, credit unions and finance companies – and introduce a deposit insurance scheme for up to $100,000 if a deposit-taker collapsed.
The reforms aim to protect society from damage to the financial system and wider economy, which could be caused by the failure of individual deposit takers or excessive risk-taking by the sector.
Robertson would also be able to restrict certain types of lending, though the Reserve Bank would continue to have full discretion over which tools to use to apply the restrictions.
It would enable Robertson and the Government to impact an area – via lending restrictions – which the Reserve Bank wouldn’t necessarily have to have regard for.
“We, as a Government, may have a different ‘risk appetite’ to that of the prudential regulator [the Reserve Bank] for financial system outcomes,” Robertson said in his Cabinet paper.
The proposals have in part been informed by last year’s soaring house prices – despite initial predictions they would fall – which were driven by low interest rates and the multi-billion dollar economic stimulus in response to the Covid-19 pandemic.
If the framework had been in place last year, for instance, the Finance Minister could have decided to restrict how much borrowing was available to housing speculators – and the Reserve Bank would have then been tasked with how to achieve that.
The Minister, in setting the lending standards, has to consult with the Reserve Bank – which Treasury recommended.
A regulatory impact statement shows that the Reserve Bank wanted the Minister to be able to restrict lending – but only in line with its own recommendations. Cabinet rejected this.
Cabinet also rejected Treasury’s other recommendations for Robertson to have even more lending powers.
The framework would also strengthen the Government’s hand in dealing with the fallout of any failing bank or financial institute.
“As Minister of Finance, I have a legitimate interest in how the Reserve Bank undertakes its crisis management and resolution functions, given the wider economic and social impact of deposit takers’ failure and the potential for public funds to be put at risk in managing such failure,” Robertson’s Cabinet paper said.
He said a stronger hand promoted “democratic legitimacy”, better management of “broader distributional trade-offs and societal preferences”, and reduced the risk of ad hoc changes to the legislative framework “arising from political frustration”.
“On the other hand, this greater role needs to be balanced against the risk of short-termism and inaction bias which can undermine financial stability, reduced confidence in the Reserve Bank and its ability to successfully achieve its statutory mandate, blurred accountability for financial policy outcomes – and financial stability in particular – and inconsistency of decision-making and a reduced role for technical expertise.
“The recommendations I am putting forward here strike the appropriate balance between this interest and the operational independence of the Reserve Bank.”
The reforms will be implemented through a new Deposit Takers Act, which is expected to be introduced towards the end of this year.
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