Government could give Finance Minister new role in restricting bank lending

New draft legislation would give Grant Robertson a role in decisions over whether to lend particular types of lending. Photo / Mark Mitchell

Finance Minister Grant Robertson has proposed giving himself new powers over bank lending.

This morning, Robertson revealed the details of the Deposit Takers Bill, which includes details of deposit protection in the event that a bank collapses, with the Government guaranteeing deposits of up to $100,000 per eligible institution.

While the Government has long signalled plans around deposit protection, Thursday's release revealed that Cabinet has agreed to a new process for setting lending restrictions, such as loan-to-value ratios, moving some degree of powers from the Reserve Bank to the Beehive.

"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.

"As with other prudential requirements, lending standards policies will be subject to more general requirements such as consultation with other government agencies and the public, and the Reserve Bank needing to have regard to the Minister of Finance's Financial Policy Remit."

Currently, the Reserve Bank has the sole discretion over restricting bank lending.

One economist immediately warned the move appeared to "seriously" undermine the operational independence of the Reserve Bank of New Zealand.

"The heavy hand of the Government is coming down in multiple areas," independent economist Cameron Bagrie said.

Bagrie said while the central bank had operational independence, it resides at the discretion of the Government of the day.

"If this is for real, that independence looks as if it's being seriously undermined," Bagrie said.

"The Reserve Bank has got a financial stability objective. If you get the Minister of Finance or other entities wading in on who you can lend to and who you can't, suddenly the financial stability objective becomes somewhat secondary to a political one."

A former top Reserve Bank official said he welcomed more political involvement in setting regulatory direction but said the changes were badly expressed.

Michael Reddell, a former special advisor at the Reserve Bank said the move on lending restrictions appeared to be a "slightly curious step, in broadly the right direction".

"This seems to be saying 'you can regulate lending to investors but not first home buyers, or lending to home owners but not farmers', and that does seem a bit odd," Reddell said.

Reddell was of the belief that the moves did not go far enough, as major uses of policy should be decided by ministers because "only ministers are accountable for this sort of stuff that directly affects firms and households".

It would have been more sensible if the changes were expressed as giving the minister power to determine what sort of regulatory restrictions the bank can use, but that the Reserve Bank remained operationally independent in how these apply to individual institutions.

"It looks like a loose step in the right direction of saying 'this is something Ministers should have more say over', but it looks badly expressed," Reddell said.

The case for Reserve Bank independence was strong on areas where there was broad agreement, such as inflation targeting, as most people both believed that low, stable inflation was good, and it was also easy to measure.

"For other things, the standard textbooks on regulator intervention say 'if you can't clearly specify a goal, then you can't sensibly delegate these powers to an independent agency'. You want to keep those powers at a political level, because the politicians are the only people that you can hold accountable in the broad sense for the use of those powers."

Protection level raised

Robertson said the measures on deposit protection, part of a review of the Reserve Bank of New Zealand Act, "have been the subject of extensive consultation" and "will help protect New Zealand's financial system and wider economy from damage that could be caused by excessive risk-taking by the deposit-taking sector and any resulting failures of institutions".

He added: "While New Zealand's financial system is sound and well-positioned to withstand the stress posed by Covid-19, these reforms ensure the Reserve Bank is better equipped to protect and promote financial stability in the future."

Initially, the Government had proposed guaranteeing only up to $50,000 per institution, but this had been raised to $100,000 as a result of feedback.

"This will fully protect 93 per cent of depositors," Robertson said.