Bollard mulls options to prick future bubbles

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard has flagged a handful of tools he may use to help damp future asset and credit bubbles and maintain the stability of New Zealand's financial system.

The bank has been looking at new ways to cool the economy after the housing bubble through the past decade underlined the blunt approach of monetary policy.

Bollard told a Basel 3 conference in Sydney the bank has been looking at new options for the past year, based on credit, accounting, liquidity and capital buffering.

"Rapid credit and asset price growth have amplified the general economic cycle and have made monetary policy's task of controlling inflation more difficult," Bollard said. "We have seen the difficulties that can arise when interest rates alone are used."

Earlier this decade, Bollard came under fire for not acting fast enough to cool New Zealand's housing market, though he's generally been applauded for his rapid response to the credit crunch in 2008.

Bollard said any new tools would be used infrequently, and would probably be used counter-cyclically when credit growth was "exceptionally strong".

Modelling found the tools' impact may be limited, though Bollard said their existence may encourage markets to self-correct.

The Reserve Bank is looking at loan-to-value restrictions to damp credit bubbles, returning to loan provisioning over the life of a loan portfolio rather than current losses, basing capital requirements on sectoral risk and introducing a capital buffer.

The Reserve Bank has forced lenders to reduce their reliance on short-term overseas funding by introducing its core funding ratio.

That's seen unprecedented competition among banks to tap domestic investors, and driven up interest rates on term deposits. Still, the International Monetary Fund says the ratio is too low, and should probably be higher than the 75 per cent mooted.

Bollard said the ratio has reduced the bank's need to lean so heavily on the official cash rate, and has helped damp the attractiveness of the so-called 'carry trade' in the New Zealand dollar, where investors take out low interest rate loans in one currency to park their fund in other nations with high rates.

The bank is assessing the potential impact of Basel 3 banking standards on New Zealand, and hasn't made a final decision on what measures to adopt, Bollard said.

"We do not propose to 'lead the world', but just as most jurisdictions are likely to implement Basel 3 ahead of the Basel committee's timeline, we would expect to do likewise," he said.