RBNZ's Bollard hints at tougher capital rules for banks after Jackson Hole
31st Aug 09, 8:53am
Reserve Bank Governor Alan Bollard has written a 'state of the nation' piece after his visit to Jackson Hole in Wyoming for the annual conflab of the world's central bankers. The piece published in the NZ Herald was largely unsurprising, but it did include a couple of hints about tougher capital rules for banks. The comments come 10 days before the Reserve Bank's September quarter monetary policy statement and after Bollard voiced concern last month about New Zealand slipping back into its 'bad old habits' of borrowing heavily via banks to invest in property. Bollard is concerned that banks may continue pumping more debt into the housing sector because new Basel II rules mean banks set their capital requirements based on past bad debt histories. Housing has low loan loss histories, which means housing lending requires relatively less capital, although the Reserve Bank has imposed a 15% 'regulatory adjustment' top up to their capital levels. He has returned from Jackson Hole talking about moves afoot internationally to toughen capital levels for banks to avoid a situation where banks put aside less capital when times a good and loan losses are low. Banks should be putting aside even more capital when losses are low, he suggested. Here is the key passage below.
Internationally and in New Zealand two important new regulatory standards have been introduced recently: International Financial Regulatory Standards, and Basel II risk-weighted capital requirements for banks. If not carefully implemented, these new standards could be pro-cyclical - encouraging banks to over-lend during economic booms and tighten in a downturn. We expect new international standards with the G-20 group of countries looking to re-introduce dynamic provisioning (ensuring banks' accounts provide for potential losses as loans are made). They are also considering counter-cyclical capital instruments (with banks building up capital reserves when the economy is growing, that can be drawn down when it contracts). At the Reserve Bank, we have taken a 'through-the-cycle' approach to Basel II, to avoid pro-cyclicality, but we are following international developments with interest.A final note. Allan Bollard displayed his many talents in the NZ Herald piece published in the newspaper on Saturday. It included a watercolour by him of the Alpine surrounds of Jackson Hole (not the picture above though), which made me want to go on holiday there. Central bankers have all the fun.