IMF Cautions New Zealand Against Pushing Its Central Bank

The International Monetary Fund (IMF) has cautioned the New Zealand Government against pushing its Reserve Bank of New Zealand (RBNZ) bending too far backwards, in its bid to deregulate to spur more competition in the sector.

New Zealand’s Finance Minister Nicola Willis has been receiving suggestions on whether the government should make the RBNZ adopt a soft approach on the way it has been regulating banks in the country.

The banks have been requesting the government to allow them to hold less capital, so that they would be able to lower their interest rates a little, and possibly lend more to businesses.

Even the government appointed Commerce Commission has suggested the rules could be changed to make it easier for small banks to compete with big ones. However, the move is fraught with dangers as changing the rules could boost banks’ profits but expose them to risks of collapsing during a crisis.

On the other hand, the IMF is recommending regulators stay focused on ensuring the rules make the financial system stable.

“The primary objective of prudential regulation [i.e. the bank capital rules] should be to safeguard financial stability, calibrated to the risks and vulnerabilities faced by New Zealand,” the IMF said in its preliminary findings following a routine review it’s doing of New Zealand.

“The government policies to strengthen banking competition will need to be carefully designed to preserve the primacy of financial stability,” the IMF said.

The IMF also said that encouraging stronger competition for deposits and loans can be achieved through measures including faster adoption of open banking, reducing regulatory barriers to entry, enhancing fee transparency, and making it easier to switch providers.

“Efforts to attract a private capital injection for Kiwibank could allow the bank to boost its lending activity,” the IMF felt.

Financial Stability

On New Zealand’s financial stability, it said the RBNZ should monitor the effects of lower interest rates, and make full use of loan-to-value ratio (LVR) and debt-to-income (DTI) restrictions if risks emerge.

It means that the RBNZ should require those seeking mortgages to have greater deposits, or higher levels of income compared to the size of their loans, should a lower interest rate environment see banks do too much risky lending.

“Given the chronic housing shortage, the already high household leverage, and the propensity in New Zealand for rapid housing credit growth, the RBNZ should monitor the effect of its monetary policy, easing and make full use of its macroprudential toolbox to control the emergence of risks,” the IMF said.

While reiterating its call to the government introduce capital gains tax, the IMF said that the tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivise investment and foster productivity growth.

The various options include a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime. “The growth implications and distributional effects of these reforms should be carefully considered to inform the design of policies,” the IMF added.