Bank and financial stability regulations will soon be set by a committee made up of Reserve Bank staff, board members, and external experts

The Reserve Bank (RBNZ) says it will form a new Financial Policy Committee (FPC) to set financial stability settings and run prudential regulation.

The FPC will be made up of the RBNZ board Chairman, the Governor, three other board members, and two external experts — mirroring the RBNZ's existing Monetary Policy Committee which sets the Official Cash Rate. Its establishment was a recommendation from the banking inquiry undertaken by Parliament’s Finance and Expenditure Committee earlier this year. 

Once formed, the FPC will be in charge of setting lending restrictions such as debt-to-income and loan-to-value ratios. It would also set capital and liquidity requirements for banks and other deposit takers.

RBNZ Board Deputy Chairman Rodger Finlay said the RBNZ would soon advertise for the two external FPC members and plans to have the committee operational from early 2026.

Currently, financial stability and macroprudential regulation policies are set by the RBNZ Governor with input from staff and oversight from the board of directors. But some critics have complained the board lacks expertise and has not scrutinised decisions sufficiently.

Finlay said the FPC would strengthen the policymaking process and bring in more expertise.

“The decision to create the FPC followed engagement with the Treasury and Minister of Finance on ways to apply greater expertise and experience to financial policy decisions. A committee with formal policy decision-making authority from the RBNZ Board and credible external experts was seen to achieve this outcome,” Finlay said. 

“Service on the FPC is a great opportunity to be at the heart of financial policy making. We look forward to receiving applications from experts who can give us independent perspectives and constructively challenge policy proposals.”

Parliament’s Finance and Expenditure Committee said in its report that its specialist adviser, director and economist Murray Sherwin, had said there was a “perception” the RBNZ had been “overly conservative in assessing risk”.

“Given the concerns raised by the Commerce Commission and submitters, we agree that the Reserve Bank’s prudential role could benefit from enhanced scrutiny,” it concluded.

Some other central banks, including the Bank of England where Governor Christian Hawkesby previously worked, already use this committee model for setting financial regulations.

Incoming RBNZ Governor Anna Breman comes from Sweden's central bank Riksbank, which is not responsible for prudential regulation. Finansinspektionen is Sweden's prudential regulator.

Establishing a Prudential Policy Committee was considered during the 2017 RBNZ reforms but was ultimately not pursued. Parliament’s Finance and Expenditure Committee report recommended the RBNZ Act should be amended to establish the committee after all. 

The RBNZ’s board has instead opted to create the committee without legislative change. It also proactively began a review of bank capital requirements in response to the inquiry, before the report was even delivered.