Drink after reading: Liquidity tips for retail investors

The Reserve Bank's latest stab at constraining the activities of finance companies – and other entities in the so-called non-bank deposit-taking, or NBDT, sector – reveals the nation's finest financial brains are rather dismissive of the perceptive powers of the average punter.

In a section of the just-released consultation paper on proposals for regulating the liquidity requirements for NBDTs, the Reserve Bank notes that requiring greater consistency and conservatism in the sector could encourage "investor discipline."

"Given the reliance on retail funding (rather than wholesale funding) by the NBDT sector, arguably investor discipline does not play as big a role as in the case of the banking sector," the Bank paper snootily says.

The Bank's argument here seems to be that no matter how much disclosure you throw at retail investors they'll either ignore it, or not know what to make of it or how to act on the information.

That doesn't mean they shouldn't try, though.

In the preamble to its dissertation on liquidity the Reserve Bank lists one of its regulation-drafting principles as "the desirability of providing to depositors adequate information to enable them to assess risk in relation to potential investments and to distinguish between high-risk and low-risk deposit takers."

Another of its principles – or sub-principles really – reminds us "that depositors are responsible for assessing risk in relation to potential investments and for their own investment choices."

This is no easy task, as a perusal of the, quite technical, NBDT liquidity proposals will prove - after reading it you might need a drink.