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Social impacts of banking crises a relevant consideration for bank capital policy, RBNZ background paper on proposals to increase bank capital requirements says

Social impacts of banking crises a relevant consideration for bank capital policy, RBNZ background paper on proposals to increase bank capital requirements says

The Reserve Bank's proposals for increased bank capital requirements include consideration of the social impacts of banking crises, a paper released by the Reserve Bank says.

"While the Reserve Bank’s explicit mandate does not make reference to societal well-being, the social impacts of crises are a relevant consideration for society and society’s attitudes towards the risk of harm from crises that we seek to represent in our capital policy. The idea that economic policies, and by association, financial regulations, should be set after considering outcomes in the broadest sense is not novel," the Reserve Bank says.

This comment comes in a Reserve Bank capital review background paper entitled An outline of the analysis supporting the risk appetite framework. Released on Wednesday, the paper is authored by Susan Guthrie, a Reserve Bank adviser on financial system policy and analysis. Guthrie was also co-author, alongside Gareth Morgan, of the book The Big Kahuna: Turning Tax and Welfare on Its Head in New Zealand.

Guthrie's highlighting of well-being issues comes after Reserve Bank Deputy Governor and General Manager for Financial Stability Geoff Bascand used "well-being" eight times, including in the title, in a February speech on the capital proposals. Finance Minister Grant Robertson is due to unveil the Government's first well-being budget on May 30.

The Reserve Bank's capital proposals make the explicit assumption that New Zealand is not prepared to tolerate a system-wide banking crisis more than once every 200 years, although Guthrie notes the absence of a systemic banking crisis in NZ’s modern history. (There's a Reserve Bank paper on NZ banking failures here). She says a decision was made to define the policy goal as the banking system having sufficient capital to retain the confidence of the market when faced with losses as large as, but not larger than, losses that might arise once every 200 years.

"We don’t have evidence about New Zealanders’ tolerance for banking crises, and we hope that as a result of the consultative process we might become better informed. However for the purposes of arriving at a capital proposal we needed a starting assumption, and that became 1/200," Guthrie writes.

She says failure probability rates are common in similar regulatory frameworks.

"For example, internationally, some insurance regulators administer solvency standards that specify a probability of ‘ruin’ that is not greater than 1/200 years. In New Zealand, non-life insurers are subject to a solvency requirement of 1/1000 years in relation to earthquake risks and 1/250 for other non-life catastrophes." 

"In the US in 2017, analysts at the Federal Deposit Insurance Corporation used a risk tolerance of 1/500 years in their modelling work related to setting the reserve ratio for the US deposit insurance fund. A risk tolerance is also embedded in the capital equation specified in the Basel III standards and used by banks permitted to model their risk weights. A ‘confidence level’ of 99.9% is specified, this translates to a risk tolerance of 1/1000 years," says Guthrie. 

How tolerant should the Reserve Bank be to the risk of a banking crisis?

Says Guthrie; "There are thus a range of risk tolerances evident in financial sector regulation around the world and in New Zealand. The risk tolerances used in other areas of financial regulation provided context for the decision to adopt 1/200 when setting minimum bank capital requirements."

"More fundamentally, though, in order to set a risk tolerance for policy purposes it was necessary to consider the adverse economic and social impacts of banking crises. Acting as an agent for society, how tolerant should the Reserve Bank be of the risk of a banking crisis, given the available evidence about the impacts of such a crisis?" Asks Guthrie.

She goes on to acknowledge the Reserve Bank’s mandate does not explicitly make reference to societal well-being. Nonetheless she argues the social impacts of crises are a relevant consideration for society, and for the Reserve Bank to consider in its bank capital policy.

“It is essential that Governments take into account the likely social implications of their economic policies. It has been shown, time and again, that economic policies considered in isolation from their social outcomes can have dire consequences for poverty, employment, nutrition, health and education, which in turn, adversely affect long-term sustainable development," the paper says sourcing this to the United Nations.

"There is a large literature about the economic and social impacts of deep and prolonged recessions, such as are likely to arise in the event of a banking crises. A common theme in the literature is the harm to mental and physical health, family cohesion and community connectedness caused by the economic stress induced by a severe downturn – through unemployment, falling incomes, reduced savings and/or declining asset values. There is evidence of these impacts in both developed and developing countries although local circumstances can act to mitigate the effects."

Again sourcing the UN, she says that whilst systemic data's not available, there's growing evidence that a crisis has significant impacts on individuals, families and communities in terms of wellness, cohesion and conflict. This can include increases to rates of mental illness, substance abuse and suicide.

'Enduring effects on society as a whole'

Guthrie argues evidence should be considered in detail, providing insight into why the likes of the World Health Organisation, the World Bank and the United Nations see the societal impacts of financial crises as being long-lived.  

"The break-up of families, ill-health, reduced spending on healthcare and nutrition and societal unrest can all be expected to have enduring effects on society as a whole."

Below is detail from Guthrie's paper on these perceived impacts.

Impacts on physical health:
 Public health impacts from prolonged recessions – such as increased mortality due to heart disease and illnesses such as liver cirrhosis related to increased alcoholism - have been long documented.

“Adverse health effects are mostly found among the “lower socio-economic classes” without economic security. The lack of economic security is often stressful: social and family structures break down and habits harmful to health are adopted. These effects may be manifested in a psychopathological event, such as suicide, or, after a time lag of a few years, in chronic diseases.” 

Impacts on mental health:
 “A recent study of 26 countries in the European Union found that for every one percent increase in unemployment, the suicide rate for people under 65 years of age went up by 0.8 percent.” 

 “During the Asian crisis, overall poverty rose from 11 percent to 18 percent in Indonesia, and urban poverty doubled to 18 percent in Korea. Previous studies also point to increased inequality associated with financial crises in a panel of advanced and emerging market countries during 1988-2010, with the impact rising along with severity of recessions. Research also shows that the average rise in income inequality during recessions tends to be larger than the fall during booms, suggesting that the poor tend to get a bigger share of the pain than the prosperity.” 

 “Economic crises also coincide with a deterioration in social cohesion. During the Great Depression in 1929-32, for example, there was a 40 percent increase in suicide rates and a 10 percent increase in deaths from all causes in the United States. Similarly, there was a 39 percent increase in suicide rates among males in Japan during the Asian crisis, a 44 percent increase in Hong Kong SAR, China, and a 45 percent rise in Korea and Thailand.” 

Impacts on family cohesion:
 “Economic stress is a major source of family tension and a leading cause of family breakups. A study of housing prices and marital dissolution in the United Kingdom in the period 1991 to 2004 found that a 10 percent fall in housing prices was associated with an additional 5 percent of couples breaking up.” 

 “Although data are scarce, some countries have seen an increase in cases of domestic violence linked to the crisis. For instance, a survey of 630 domestic violence shelters in the United States reported a 75 percent increase in the number of requests for services since the onset of the crisis…The survey also found that abuse had become more severe…”

Impacts on the wellbeing of children and youth:
 “Recent reports by UNICEF, for example, point to a significant deterioration in child well-being in a number of advanced countries, based on measures of material well-being, health and safety, education, behaviours and risks, and housing and environment….Similarly, the UN composite Human Development Index, computed as a function of measures of life expectancy at birth, access to knowledge, and a decent standard of living, declined between 2007 and 2012 for a number of middle and high income countries in the Middle East and Europe as well as for small island states.” 

 “The youth have been particularly hit hard by the crisis….The jump in the youth unemployment rate has been most pronounced in advanced economies, rising from 12.5 percent in 2007 to an estimated average of 17.9 percent in 2012. The rate has reached alarming levels in the peripheral Euro Area countries, to 59 percent in Greece and 56 percent in Spain, compared with an average rate for the Euro Area at 24 percent in mid-2013 and 7.5 percent in Germany.” 

Impacts on community connectedness:
 “We study the implications of the Great Recession for voting for anti-establishment parties, as well as for general trust and political attitudes, using regional data across Europe... We compare the regions that greatly suffered from the crisis with those that weathered the crisis relatively well – controlling or pan-European and country-specific time trends... We show that the differential [regional] impact of the crisis explains the rise of anti-establishment, often populist, parties, and also the respective drop in trust towards political parties and the European Union….” 

 “The World Health Organisation has recently highlighted the negative psychological effects of financial crises as well as the increase in crime that these typically bring.” 

Impact on vulnerable people.
“While everyone is vulnerable to their adverse consequences, financial crises hurt disproportionately the poor, as with natural disasters, contagious diseases, or climate change, given that the poor have limited capacity and instruments to insulate themselves from the shock and recover from the impact of the crisis….In any given country, crises hit particularly hard the most vulnerable – the young, the old, women and the ill. A severe financial crisis can morph into a social crisis if it is poorly handled…” 

Guthrie says the Reserve Bank believes such impacts as those detailed above are likely to lead to society being relatively intolerant of banking crises.

"However, one aim of the consultation is to generate a public conversation, and prompt feedback, about this important issue," she writes.

She says the 1/200 assumption was "accepted as being a reasonable approximation, in the absence of any information to the contrary," as to what society might consider an appropriate risk tolerance.

Full cost-benefit assessment for a Regulatory Impact Statement to come

Meanwhile, Guthrie notes her paper isn't intended to provide a cost-benefit assessment of the capital proposals. Instead she says the Reserve Bank will carry out a full cost-benefit assessment for a Regulatory Impact Statement. Nonetheless she says the concepts discussed in her paper will be an important component of that cost-benefit assessment.

"The full assessment will also consider any submissions received during the consultation period, as well as looking at alternative scenarios to look at risks around estimates of costs and benefits."

Additionally she notes other impacts of bank capital such as impacts on tax revenues.

"Where a tax regime treats interest payments by banks as a tax deductible expense, as New Zealand’s does, the more a bank substitutes debt funding for capital funding, the less tax it pays, all else equal. While an increased tax payment would be an expense to the bank, from a societal perspective it is simply a transfer and not a cost. The only cost of capital from a societal perspective is the output impact of higher lending rates," writes Guthrie.

What the RBNZ is proposing

NZ banks must currently meet a minimum total capital ratio of 10.5% of their risk weighted assets (RWA). The Reserve Bank is proposing to increase this to 18% for banks identified as ‘systemically important’, ANZ, ASB, BNZ and Westpac, and 17% for all other banks. 

"After adopting a risk tolerance of 1/200, weighing up the available evidence and considering soundness and efficiency, the decision was made to propose an increase in minimum Tier 1 capital requirements such that the minimum requirement would exceed current Tier 1 system-wide capital by $20 billion. The final proposal was expressed as capital relative to RWA, not unweighted assets, and reflected proposed changes to the calculation of RWA by the large four banks," says Guthrie.

"The final proposal equates to capital equal to 9.3% of unweighted assets, measured as total exposure at default or ‘EAD’. Assuming banks hold a voluntary buffer of 0.5% of EAD means the proposal will deliver capital equal to 9.8% of unweighted assets."

The deadline for submissions on the Reserve Bank proposals is Friday, May 3. The Reserve Bank then expects to publish final decisions in the third quarter of 2019. 

*For full details on just what the Reserve Bank is proposing for bank capital, see's three-part series here, here, and here. You can also see a video interview with Reserve Bank governor Adrian Orr on bank capital here.

*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

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“How tolerant should the Reserve Bank be to the risk of a banking crisis?”
Well we wouldn’t have to tolerate a banking crises if we stopped creating money/credit like we do. Inequality and wellbeing would improve drastically as well. Win win but sadly enough we will keep stumbling through our self created and preventable issues.



I would be interested to know how you would stop money creation,what the impacts would be on the financial system and how that would increase wellbeing and inequality.


Hi Linklater01. If you would like I could dig up an old post I wrote outlining what I would like to see for a monetary system (it’s a bit of a novel). Or here’s a link to a great presentation on the topic:

In short we allowed money creation through two key actions; the us depegging from gold causing by proxy nz to be depegged from gold and certain reforms in the banking sector in the early 80’s. This has been the major contributor to inequality as when you debase the currency assets hold/increase their value but savings/earnings are worth less. This has given an unearned advantage to those who already owned assets and made it harder for those without to accumulate wealth. I think the link from well-being to inequality has been pretty well documented however if you would like me to go over that too I’d be happy to?


It also wires the motor backwards. So wealth flows to those who front run policy, whether by luck or judgement, not to those who enrich society by being more productive. We thus lose respect for the people who generate wealth in our society and lose respect for the institutions that underpin our society. That's why Lenin reputedly saw inflation as the best way to destroy a capitalist nation.


What options could be considered to undo this Withay? I assume reconnecting to the gold standard would not work? Should savings have an automatic inflation adjustment? How?


I wish I had a perfect answer but something like the Chicago plan would be the best idea I have seen so far of how to unwind things without causing a catastrophe. This would get us back to a point where a gold standard was doable. While the gold standard is imperfect it’s still the best and fairest system we have had or that has been proposed.


I believe that those who fail to learn from history are doomed to repeat the mistakes of history and it would be a total folly to return to a gold standard. Remember what Disraeli said as far back as 1895; That Britain's gold standard was the consequence rather than the cause of her commercial success. Churchill came to regard his decision to go back on the gold standard as the greatest blunder of his life. And then their is Keynes who said this; "I have spent my strength to persuade my countrymen and the world at large to change their traditional doctrines,was I not,when many of today's iconoclasts were still worshipping the Calf,who wrote that 'Gold is a barbarous relic?' I can only agree.
On the wider issue of inequality,In his excellent book Saving Capitalism for the many,not the few,Robert Reich details the many causes of the growth in inequality,but nowhere does the gold standard appear. The recently published The Finance Curse,how global finance is making us all poorer by Nicholas Shaxon again simply doesn't mention gold,bur examines in detail,financialisation,globalisation,tax havens,etc.
i have a small library on these issues including The Spirit Level and have done several MOOCs on precisely these issues. There is of course much that I do not know,but I am as certain as I can be that the answer is not a return to some gold standard.


I agree with the learning of history and I’ve ended up looking more at the lessons learned from those who have devalued their currencies and created financial systems of centralised control and the consequences and failures of those. Just as our financial systems are failing now.
Regarding your abridged conclusions from the quoted books about inequality, ironically while the authors may not mention the gold standard, they are talking about issues (growth in inequality, financialisation particularly) that would be more or less reduced or prevented by a gold standard.
I should clarify I’m not for a gold standard because I like gold. I’m for it, or something like it because it decentralises power, holds its value for savers and enforces financial discipline by keeping asset prices relative to their productive worth encouraging productive and not speculative investment.

Is there a monetary system that you would point to as an answer if not a sound money system?



How does it decentralise power? If that were true,why would China have been increasing its holdings? The French government has long had a gold obsession,but that had nothing to do with decentralising power. Sure,many french people have held gold to avoid paying tax,but that's a somewhat different argument.
I would make the case that the significant rise in inequality is connected to the many regulatory changes made to make markets more amenable to neo-liberal thinking as promulgated by such as Hayek,Friedman and the Chicago School,than to the end of the gold standard. No system is,or ever will be perfect,but I much prefer the Social Democracy of the Nordic countries. We could split banks in to Narrow and Broad banks,as suggested by Irwin Fisher in the 30s. There is much that could be done without Keynes's 'barbarous relic'.


If peace of mind and well being are similar then I'll take on well being as well. I'd prefer not to have a haircut even though I split my "cash" across several banks. The quicker the reserve bank implement increased capital ratio and forget about writing long weasel word reports about well-being to justify their rationale, the better.


It is heartening that advisers at least recognise that RBNZ policies will have a societal impact, when so many of their actions, and those of banks suggest that they consider themselves separate from and above society. However I suggest that they somewhat under state any degree of intolerance to a banking crisis when they say "society being relatively intolerant of banking crises." Especially when current policies essentially state that it will be society who will bail out the banks in any crisis through the OBR and tax payer support because of fear of bank collapse. History tells us that the banks, and more specifically those who make the decisions in them are rarely if ever held accountable for their decisions and choices which have adverse consequences on society. The red flag here is that they are largely unregulated in a way that contrains their behaviour and holds them accountable, while protecting society's interests. And this is the responsibility of successive Governments and politicians who have singularly failed to ensure their constituents are properly and adequately protected in the event of a banking crisis. Indeed unlike any other industries, the politicians see their very constituents as the means to bail out banks in the event of a crisis. This has come about largely without the public being aware or consulted that their individual wealth has been put up effectively as collateral to protect a private industry.


Turkeys will never vote for Christmas. Neither will the large Aussie banks. For those that say there has never been a full blown crisis in NZ history, that’s true, because each time the state has bailed out the private institutions, and then gone on to award knighthoods to the perpetrators.

The very creation of the RBNZ was in response to a global crisis, the failures of the 1860’s, 1890’s, gold standard failures, Great Depression, post war recession, late 60s mid eighties, and soon and so forth.

Absolutely tired of being fleeced. Furthermore, let’s not forget that 1:200 events happen at least every generation. Models assume some normality of distribution, but real life is chaotic and processes tend to decay, leading to so called black, blue, red and green swan events. Colourful, interesting academically, but at the end of the day, damaging to society.

As a result of the social compact allowing banks to create credit, society expects that those that benefit the most in thegood times, should wear the costs in the bad times too.

Too much neo liberal capitalism at play. Let’s stop the privatisation of profits and socialisation of losses.


would be nice to think that each time government introduced a new tax, or council put up rates (beyond inflation) that they had to take into account stakeholders wellbeings too.


I am far too far out of the flow to comment directly on the details of Guthrie's latest attempt at shoring up the RBNZ proposal to encumber NZ with a $30 billion NPV scheme. I'll leave the heavy lifting to Ian Harrison - Tailrisk Economics: ex RBNZ, BIS, World Bank and IMF.
who judged the justifications prior to this harshly, and ripped into the original release of the proposals here.

The central question that is addressed in this paper is whether the benefits, (‘being more resilient to economic shocks’) are worth more than $30 billion.Our assessment is that very clearly,they are not. New Zealand could secure nearly all of the benefits of higher capital by increasing tier two capital,as the Australians are proposing to do, at about one fifth of the cost of the Reserve Bank’s proposal.

Could we have a discussion on the OBR and whether or not we should have a deposit guarantee. My view is that we should. It is said that we should be a cashless society so therefore all money creation will be by private Banks. Having money in the Bank will be compulsory Surely any sovereign Government can therefore guarantee our deposits. I will scream if anyone talks of moral hazard. Just tell that to the average person who works and saves for their future. I also believe there should be a New Zealand equivalent of the American Glass Steagal (sp) Act which was repealed there in the 1990s. As with the increase in the capital requirements proposed by the RB this would also reduce the risk of any Bank collapse.