Treasury wanted more powers over bank lending restrictions to move from the Reserve Bank to the Government, despite acknowledging the risk that electoral concerns may influence financial stability decisions.
Late last week the Treasury released a series of documents related to the final stage of the review of the Reserve Bank Act, a day after announcing a new deposit guarantee scheme and changes to the way lending restrictions are overseen.
Although the news on deposit insurance was well signalled, economists and banking figures were surprised to learn of proposed changes to the way lending rules, such as loan to value ratio (LVR) restrictions, are developed.
Under the proposals released last week, the Minister of Finance, in consultation with the Reserve Bank, will determine the types of lending the Reserve Bank can restrict, but the central bank “will then have full discretion to decide which instrument is best suited to use and how the restrictions are applied,” Robertson said.
But a regulatory impact statement released on Friday showed Treasury recommended that ministers not only determine what types of lending to be restricted, but also the tools, such as LVRs or debt to income tools.
“The Treasury considers that elected representatives do have a legitimate interest in the appropriate scope of financial stability tools, and the use and continued use of these tools,” Treasury wrote.
“If the Reserve Bank were considering new lending standards for interest-only mortgages, the Minister could recommend that a tool to ban interest-only mortgages be added to the Reserve Bank’s toolkit via regulations, which may differ from the Reserve Bank advice. However, it would still be up to the Reserve Bank to determine whether or not it would be appropriate to deploy this tool.”
The documents also show that the Reserve Bank appears to have argued strongly for the Government to guarantee a much lower level of deposits than the $100,000 Robertson announced this week.
Earlier the Government had indicated that it was considering a guarantee on deposits up to $50,000, however it raised the amount following consultation.
On Thursday Reserve Bank deputy governor Geoff Bascand said there was evidence that depositors generally believed their deposits already guaranteed, However in the consultation, the Reserve Bank argued for the limit to be set at $50,000 as it was concerned that the higher limit could lead to increased risk taking by the banks.
“The Reserve Bank places substantial weight on the moral hazard risks that arise from protecting depositors from loss at higher coverage limits, and the greater reliance on costly and imperfect mitigation tools that this creates.”
The Treasury however said limiting the guarantee at $50,000 left a number of people exposed who were not in a position to monitor the health of their bank.
“A $100,000 limit would cover a substantial number of depositors who are otherwise not necessarily well placed to monitor their deposit taker, such as first-home buyers and retirees,” the regulatory impact statement said of Treasury’s view.
“At a $100,000 limit the vast majority of depositors would be fully covered at the vast majority of deposit takers, while leaving a significant amount of the value of deposits unprotected.”
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