Comment: Reserve Bank Deputy Governor Christian Hawkesby’s conclusion seems self-evident: Financial inclusion for all New Zealanders can contribute to the stability of our banks and other financial institutions.
If people can deposit their dosh, that helps secure the institutions. Increased lending to smaller firms can help diversify lenders’ asset portfolios – as well as helping businesses get a foot up.
Just look at Māori business creation, for instance. The Reserve Bank finds they’ve been held back by the “persistently higher” interest rates they pay on their liabilities, as shown in the chart below.
Interest rate on firm liabilities
The Reserve Bank has been working with lending and deposit-taking institutions to assess how they lend to Māori, and how they lend against Māori land.
“An efficient, effective, and stable financial system is one where capital is allocated on the basis of risk and return, one in which there is equitable access to capital for all firms, including Māori firms,” says Hawkesby, in a speech to the Institute of Directors in Canterbury.
“The recent high profile failures of Silicon Valley Bank and Credit Suisse have proven pertinent reminders of the importance of financial stability.”
But a sneak peek at an extract from next month’s Reserve Bank financial stability report, underpinning Hawkesby’s speech, reveals financial stability and inclusion aren’t always bedfellows.
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The subprime mortgage crisis in the US showed how extending access to credit for marginal borrowers could result in financial institutions taking on too much risk.
In India, micro-finance institutions (non-bank deposit-takers in the New Zealand context) target the needs of their regions and under-served communities, but can face greater challenges with connected lending, poor governance and geographic concentration, increasing their exposure to downturns and natural disasters.
In NZ, the collapse of finance companies such as South Canterbury Finance showed how institutions that supported inclusion (eg, through small business financing) could also pose a risk to stability if lending standards were undermined.
“Bigger banks tend not to be as accommodating … of less common or less conventional arrangements in how people live their lives.”
– finance and expenditure select committee report
What Hawkesby and the Reserve Bank don’t say is that it’s now up to MPs to strike that balance between freeing up non-bank institutions like credit unions, building societies and finance companies to serve communities that the banks don’t want to serve – and tighter regulation to make sure they don’t go under, taking New Zealanders’ money with them.
What the Reserve Bank does hint at is the possibility of lighter-touch controls on institutions that are serving customers that bigger banks won’t touch.
The new Deposit Takers Bill includes a deposit insurance scheme covering deposits of up to $100,000. It is intended to allow greater oversight of smaller financial institutions – but those small players have resisted.
Parliament’s finance and expenditure select committee has this month reported back on the bill. “Protecting the diversity of entities has been front-of-mind for the committee, which was warned that onerous rules could crush smaller deposit takers,” its report says.
“These smaller deposit-takers play an important role in providing access to financial services for New Zealanders who may struggle to access finance from the big banks,” the report said. “Bigger banks tend not to be as accommodating … of less common or less conventional arrangements in how people live their lives.”
Softer rules for smaller institutions would be a bold call for MPs – and one they might regret, if the troubles that have hit SVB, Credit Suisse and others extend down to this corner of the globe.