Economist says increased bank capital will hurt the economy

by Roxanne Libatique08 Oct 2019

An economist believes that the Reserve Bank of New Zealand (RBNZ)’s plan to increase the capital NZ banks have to hold will just hurt the economy.

Economist Michael Reddell, who has spent most of his career at RBNZ, commented that the bank’s move is unnecessary and will just hurt the economy, especially small businesses and those in the agriculture industry.

 "What the evidence shows in New Zealand is that we could have the unemployment rate go to 13 percent, we could have house prices fall by 50 percent and still it's highly unlikely that with current minimum capital ratios, that any banks' viability would be severely impaired,” Reddell told NZ Herald.

Read more: RBNZ will revisit bank capital proposals before final decision

RBNZ has proposed increasing the minimum amount of tier 1 common equity capital the banks have to hold – from 8.5% to 16% for the big four banks while 15% for the smaller banks.

Reddell, however, explained that requiring the big banks to hold 16% capital could cost the economy a whopping $1.8 billion a year and therefore prompt banks to just pull money out of the country.

"If the 16 percent happens and the shareholders don't want to put in more money they're going to shrink their businesses. But that is not a comfortable place to sit. Those big banks will have an expected rate of return on their investment in all their activities around the world and if the New Zealand subsidiary is not producing that rate of return then they'll dis-invest,” he said.

Robert MacCulloch, professor of macro-economics at Auckland University, shared the same sentiments – adding that the RBNZ governor’s style is part of the problem.

"Usually the conservative central bank governor, like Alan Bollard or Graeme Wheeler, tried to avoid controversy. It's an institution which is meant to be quietly humming along without attracting great controversy, but there seems to be a new-found zeal to say things that frighten people - to get in the news, to shock the markets,” MacCulloch said.

RBNZ governor Adrian Orr, however, said he was worried that the bank was too narrowly focused and too insular – which needed to be addressed.

“Do we have a truly diverse and inclusive team or do we all look the same and think the same? This is what we've been doing at the bank in the last 18 months. Some people have chosen to continue on that journey. Some people were asked not to continue on that journey and that's where we're at,” Orr said.

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