MPs returned to Wellington from the summer recess on Tuesday and while the 2019 political year has barely begun, MPs and politicians are already casting minds forth to 2020 — election year.

Unhelpfully for the Government, the biggest political land mine is likely to come from one of the few arms of government over which they don’t have control: the Reserve Bank — the institution charged with regulating our banks and setting interest rates. 

Last year, the RBNZ published a proposal to dramatically increase the minimum amount of capital banks are required to hold. This would mean banks were better insulated against a major financial crisis, but it would come at a large cost. The proposal, described by some in the industry as “radical”, could eat up as much as 70 percent of bank profits over the five years it is implemented. 

The brouhaha over the proposals deepened over the summer when Swiss investment bank UBS took the unusual decision of publishing a dramatic research paper outlining the possible consumer costs of the move. UBS said it could add between 80 and 125 basis points to mortgage books as banks attempted to claw back the cost. 

This would hurt lending in two ways. Banks could lend less, meaning they wouldn’t have to hold as much capital, or they could pass some or all of the additional cost on to borrowers, making it more difficult and expensive to get a mortgage or any other kind of loan.

Finance Minister Grant Robertson and National Finance Spokesperson Amy Adams were able to comment on the controversy as they returned to Parliament on Tuesday. 

UBS said mortgages would need to be repriced by roughly 80-125 basis points to compensate for increased lending costs, making it more expensive for people to get a mortgage. 

Of course there are other ways to accommodate the change. UBS said it believed major banks would be under both “regulatory and political pressure” not to increase the cost of their mortgages, they may “ration credit”, which means lending less. But that’s hardly welcome news to the Government, which will want the banks to lend more — especially to first home buyers looking to get into a KiwiBuild home. 

Robertson was cautious — siding with the Reserve Bank.

“The Reserve Bank’s view is while there might be some small impact around costs and profits of banks they believe overall it will lead to a more stable banking system which will lower costs — that’s the view of the Reserve Bank, that’s the decision they’ve made,” he said. 

Robertson played down the likelihood of the Government intervening in the economy in the case of a slowdown triggered by the move — but pointedly refused to rule it out. 

“We will obviously keep an eye on the situation, this is a decision they get to make we will keep an eye on the situation and monitor bank credit. It’s an issue that affects the economy overall, but at the moment I haven’t had any indication that we need to do that,” he said. 

The situation is awkward for the Government as it is unable to comment in great detail on the bank’s decisions lest it be seen to undermine that independence. 

John Key got into hot water for his pointed comments on the bank’s decision to impose loan-to-value ratios. Robertson, knowing Labour governments are already judged harshly on the economy, is usually even more cautious. His Reserve Bank Act reform pushed the boat out by placing Treasury representatives on the Monetary Policy Committee — Robertson knows not to go too far. 

“We have an independent monetary policy for a reason, and I will continue to defend that, but obviously we have to look at the health of the overall economy and I will continue to monitor it,” he said. 

Opposition Finance Spokesperson Amy Adams was more forthright in her upbraiding of the Bank’s proposals. 

“This seems excessive, there’s been no clear basis for it and it undoubtedly will push extra costs to consumers,” Adams said.

“Given the effects on the economy I entirely agree with the question UBS is posing, which is “is the risk worth it,” she said. 

Adams said that given the likely effects on the economy, the Reserve Bank should be asking whether the changes were worth the damage they could cause.

Robertson will want to monitor the situation closely. Though no date has been set, the changes are likely to come into effect in late 2019, meaning consumers would start to feel them in 2020 — election year, just when the Government will be wanting people to feel as rich as possible. 

Just look at KiwiBuild: it’s become clear that one of the key constraints on the policy is demand. Just 289 buyers have prequalified for the 236 houses currently under construction. If banks tighten their lending, the Government could find it even more difficult to get first home buyers into the scheme — they simply won’t be able to afford the mortgages. 

The last thing you want in election year is a public feeling poorer. 

Robertson may get some indication of what to expect in 2020 when Reserve Bank Governor Adrian Orr delivers Wednesday’s Monetary Policy Statement on Wednesday. 

While Orr is regarded as something of a maverick governor, industry figures also say he can be susceptible to media pressure, which they say was the reason behind Orr deciding to launch an inquiry into bank culture and conduct after previously ruling one out. Media outcry was such that an inquiry was quickly announced. UBS’s proclaiming that the proposals “appear unnecessary and potentially damaging,” could provoke a similar change. 

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