Macro instruments may help financial system resilience in crisis time and moderate credit cycles, but expectations need to be realistic, the Reserve Bank of New Zealand Governor said on Friday. Alan Bollard said policymakers were increasingly looking at macro-prudential instruments - policy tools that might be used to promote a more stable and resilient financial system and help smooth the credit cycle, reducing the risk of boom-and-bust cycles.
"There has not been a pressing need for the use of such tools given recent weakness in the credit cycle," he said at a conference on Basel 3 in Sydney. "However, we do need to keep preparing for how we might deal with credit and asset price booms when they recur in the future."
Bollard said the RBNZ has undertaken a review of macro-prudential tools, including credit-based measures, accounting tools, liquidity instruments and capital buffers and would contemplate using in appropriate circumstances, while keeping expectations realistic. "While none would be a silver bullet in terms of moderating the credit cycle, we believe some could make a useful contribution," he said.
The IMF said this week that New Zealand's banking sector remained profitable and Tier I capital adequacy has improved to about 10 percent. It said non-performing loans have increased to 2 percent of total loans, still low by advanced country standards, and sound regulation and supervision helped maintain stability.
The IMF also said the merits of raising bank capital gradually to levels significantly above the Basel III requirements for New Zealand banks as a buffer against negative shocks should be considered. The four large Australian-owned New Zealand banks - National Australia Bank , Commonwealth Bank of Australia , Westpac Banking Corp and ANZ - alone comprise about 80 percent of the banking system and their assets amount to almost 160 percent of GDP. Given their size, they are perceived as too big to fail and pose a sizeable contingent fiscal liability.
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