IMF cautions Government against pushing back too hard against the Reserve Bank on regulation

The IMF says the RBNZ should "make full use" of its LVR and DTI mortgage lending rules if financial stability risks emerge. Photo / Mark Mitchell

The International Monetary Fund (IMF) is cautioning the Government against bending too far backwards, deregulating banks in a bid to spur more competition in the sector.

Finance Minister Nicola Willis is getting advice on whether she should make the Reserve Bank of New Zealand (RBNZ) loosen the way it regulates banks.

She is receptive to what the banks are telling her – that if they can hold less capital, they’d be able to lower their interest rates a little, and possibly lend more to businesses.

The Commerce Commission has also suggested the rules could be changed to make it easier for small banks to compete with big ones.

The flipside is that changing the rules could boost banks’ profits and put banks more at risk of collapsing during a crisis.

Indeed, the IMF is recommending regulators stay focused on ensuring the rules make the financial system stable.

“The primary objective of prudential regulation [i.e. the bank capital rules] should be to safeguard financial stability, calibrated to the risks and vulnerabilities faced by New Zealand,” the IMF said in a statement summarising its preliminary findings of a routine review it’s doing of New Zealand.

“Government policies to strengthen banking competition will need to be carefully designed to preserve the primacy of financial stability.”

The RBNZ has been a fierce defender of its bank capital rules, since it decided, in 2019 to incrementally tighten them. The new rules will be fully phased in by 2028.

Adrian Orr, who resigned as Governor last week, took a particularly hard line, pushing back against those who tried to get him to soften the rules.

The IMF went on to say: “Encouraging stronger competition for deposits and loans can be achieved through measures including faster adoption of open banking, reducing regulatory barriers to entry, enhancing fee transparency, and making it easier to switch providers. Efforts to attract a private capital injection for Kiwibank could allow the bank to boost its lending activity.”

The IMF touched on a number of other issues salient to the New Zealand economy.

On the topic of financial stability, it said the RBNZ should monitor the effects of lower interest rates, and “make full use” of loan-to-value ratio (LVR) and debt-to-income (DTI) restrictions if risks emerge.

In other words, the RBNZ should require those seeking mortgages to have greater deposits, or higher levels of income compared to the size of their loans, should a lower interest rate environment see banks do too much risky lending.

“Given the chronic housing shortage, the already high household leverage, and the propensity in New Zealand for rapid housing credit growth, the RBNZ should monitor the effect of its [monetary policy] easing and make full use of its macroprudential toolbox to control the emergence of risks,” the IMF said.

The organisation repeated its call for the introduction of a capital gains tax.

“Tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivise investment and foster productivity growth,” it said.

“Options include a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime.

“The growth implications and distributional effects of these reforms should be carefully considered to inform the design of policies.”

The Government is open to lowering the corporate income tax rate, but is opposed to the introduction of a capital gains tax to replace the two-year bright-line test.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.