The Government's review of the Reserve Bank of New Zealand Act will establish a new process for setting lending restrictions, such as loan-to-valuation restrictions on bank home loans, and introduce what appears to be a more active role for the Minister of Finance.
Announcing plans for the long anticipated deposit insurance scheme and the Deposit Takers Bill on Thursday, Finance Minister Grant Robertson noted the reforms will include a new process for setting lending restrictions, such as loan-to-valuation (LVR) ratio restrictions.
“This will give the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict. The Reserve Bank will then have full discretion to decide which instrument is best suited to use and how the restrictions are applied,” Robertson said.
A Memorandum of Understanding signed by Finance Minister Bill English and Reserve Bank Governor Graeme Wheeler in 2013, includes LVR restrictions and three other so-called macro-prudential tools the Reserve Bank can use to try to dampen excessive growth in credit and asset prices and strengthen the financial system. At that time English said the ultimate decision on any macro-prudential intervention would be taken by Wheeler. However, he was to consult with the Finance Minister and Treasury from the point where the Reserve Bank was actively considering macro-prudential intervention, and inform them prior to making any decision on deployment of a macro-prudential tool.
Now Robertson says the types of lending that lending standards may apply to, such as residential property or agricultural loans, will be prescribed by regulations, leaving the types of borrowers and the types of macro-prudential instruments used to be set by the Reserve Bank in standards set by the Reserve Bank. More broadly these standards will replace existing conditions of bank registration.
The Government says empowering the Reserve Bank to set lending standards that define specific tools is important in supporting the Reserve Bank’s operational independence in setting macro-prudential policy. There will, however, be a role for the Minister of Finance in changing the scope of lending standards.
"Cabinet has agreed that the Deposit Takers Bill will include a requirement that the Minister of Finance can make regulations, following consultation with the Reserve Bank, defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives," the Government says.
Using standards rather than conditions of bank registration as the primary tool for imposing prudential requirements on deposit takers will recognise that prudential requirements are often of a legislative character, the Government says. The shift to standards mimics Australia where the Australian Prudential Regulation Authority issues prudential and reporting standards.
"I.E. establish legally binding obligations for all deposit takers, or classes of deposit takers in contrast to non-binding guidance a regulator may choose to issue, and provide a more robust statutory framework for setting prudential requirements. More specifically, it will replace conditions of registration, which define most of the rules that registered banks must adhere to in order to operate in New Zealand with standards, which are a form of delegated legislation. Standards will be set by the Reserve Bank and be classified as secondary legislation under the Legislation Act 2019, which means they will be subject to parliamentary oversight and potential disallowance via the Regulations Review Committee."
"This approach maintains the Reserve Bank’s operational independence in setting prudential rules, in line with international best practice, while providing a greater degree of transparency and oversight than the current approach, which primarily uses Conditions of Registration."
"The approach agreed to by Cabinet will cover the range of matters currently provided for via conditions of registration, but with more clarity where required. For example, the addition of liquidity requirements and lending standards, which are currently provided for under the broader heading of ‘risk management systems and policies’. The scope of standards is also intended to be broad enough to enable the Reserve Bank to set standards in relation to the full range of matters covered by the Basel Committee on Banking Supervision’s Core Principles, should it choose to do so," the Government says.
"The specified matters standards may relate to will be set out in the Deposit Takers Act, and may be extended via regulations. This approach aims to provide a balance between clarity on the scope of the powers being delegated to the Reserve Bank and the flexibility for these powers to be adjusted in future to accommodate new developments."