Friday, August 2, 2013
Banks should hold more capital, experts say
Banks should be required to hold more capital to protect the financial system from a potential bust in the property
market, monetary policy experts have told students at a Massey University panel discussion.
At an event put on by the Massey Business Student Group, former Reserve Bank governor Don Brash said the Reserve Bank
should have access to macro-prudential tools and that the “counter-cyclical capital buffer is the best of the options”.
The counter-cyclical capital buffer, which requires banks to hold more capital during credit booms, is one of four
macro-prudential tools being considered by the Reserve Bank to cool the property market. However, the Reserve Bank
currently favours another of the tools – restricting loan-to-value ratios for mortgage lending.
Dr Brash went on to say that interest rate increases would not provide a solution. “Whenever a herd mentality develops
around any asset class, as there is around property, it’s very hard to see any plausible interest rate change dampening
that down,” he said.
“Eight per cent, which is where interest rates were before the global financial crisis, didn’t have an impact. Twenty
per cent might, but that would do significant damage to the rest of the economy, so another instrument was always going
to be needed.”
AMP chief economist Bevan Graham agreed that “counter-cyclical capital buffers have probably got a greater role to
play”.
“If this is about financial stability, then banks holding more capital if things go pear-shaped is a good thing,” he
told students.
Associate Professor David Tripe, director of Massey’s Centre for Financial Services and Markets, said he also believed
the counter-cyclical capital buffer was the best way for the Reserve Bank to deal with a property boom.
“The best protection against a bust in property prices is the banks, collectively, to be more strongly capitalised so
they are protected, individually, against the failure of other banks,” he said.
He also rebutted arguments that the tool would take too long to implement to have any immediate effect.
“One of the arguments for restricting loan-to-value ratios is it can be implemented quickly. But if the banks knew today
that they would need to hold higher capital levels as of March 2014, they would think about the lending they are
undertaking now. We could see them cutting back on their lending more generally.
“Meanwhile LVRs might restrict some bank lending, but it won’t stop people bidding for expensive properties. Other
sources of funding are always available.”
With all the discussion of macro-prudential tools, Dr Brash also pointed out that the “best instrument for dealing with
the property bubble is one that the Reserve Bank doesn’t control – releasing more land”.
“That’s what’s driving the bubble in Auckland land prices. When you have to pay $400,000 for an eighth of an acre in
Flatbush, you know you’ve got a bubble,” he said.
Tim Ng, acting head of economics at the Reserve Bank, agreed that achieving the organisation’s objective of financial
stability was not an easy task.
“It’s not at all easy and it’s relatively new territory at least in the sense that, prior to the global financial
crisis, the prevailing philosophy was that you didn’t really have to worry about the activities of the financial system
in generating financial instability. Since the crisis, most people have said that was obviously wrong, and there has
been considerable international focus on reducing risks to the financial system.
“[With macro-prudential tools] we are very much in a second-best to third-best world. Macro-prudential tools build on
the existing prudential framework to further promote financial system stability. With house prices rising and no
evidence it’s going to stop, what we’re trying to do is protect the banking system. The more enduring solution, though,
is to fix constraints in the housing market at various points in the building process.”
All four speakers were part of an expert panel discussion called ‘This Is Your Livelihood – Contemporary Monetary Policy
Challenges in New Zealand’, put on by the Business Student Group at Massey University’s Albany campus.
Audience participation was encouraged through a live, online platform called Xorro.com, which allowed people to post
questions to the panel and answer survey questions while the discussion was taking place. The audience was asked what
they believed was the best tool for dealing with the overheated property market. The most common answer was ‘Introduce a
capital gains tax’, followed by ‘Release more land for residential developments’.
Picture caption: ‘This is Your Livelihood’ panel of experts (L-R): Bevan Graham, Dr Don Brash, Tim Ng, Associate Professor David Tripe.
ENDS