Who said the Reserve Bank doesn’t have a sense of humour? There is a chart to prove it

Friday, 6 September 2024

Join the conversation and have your say in the comments below.

ANALYSIS: They say a picture is worth 1000 words, but if you are trying to hammer home a point to someone who just doesn’t seem to get it, why not use both?

That appears to have been the philosophy of Reserve Bank deputy governor Christian Hawkesby when labouring the point on Thursday that there is a trade-off between encouraging competition in the banking industry and maintaining financial stability.

Hawkesby’s addresses was to the Finance Services Council, but it is hard not to suspect his real intended audience was Finance Minister Nicola Willis.

Willis, while in Opposition, repeatedly locked horns with Reserve Bank governor Adrian Orr over what she — and many others, to be fair — perceived to be overly-loose monetary policy.

That led to some tense exchanges in Parliament’s select committee rooms.

But if there is one policy Orr is most proud of and which he could rightly expect to be seen as his legacy, it is the moves the Reserve Bank has made to increase the resilience of the banking system, including by tightening the capital controls on banks.

Orr has required banks to hold more cash and liquid assets to back their loans, making it less likely any would collapse during hard times.

The Commerce Commission has been less than grateful however, concerned the details of the Reserve Bank’s “prudential regulations” have made it harder for smaller competitors to get a foot in the door in financial services markets.

One battleground has been whether smaller banks should pay a higher proportion of the cost of guaranteeing bank deposits if they are assessed as having a higher risk of falling over.

Willis confirmed on Wednesday that she would order the Reserve Bank to do more to promote competition in the banking sector.

“This will make it clear to the Reserve Bank that the Government expects its policies and actions to put greater emphasis on not only maintaining competition, but growing competition,“ she said.

Orr has been relatively circumspect, which has probably been good for his dignity and everyone else’s blood pressure.

So far it has largely been left to Hawkesby to ram home the point that there is a trade-off between competition and resilience in the banking system.

He helpfully drew up a chart — surely the simplest ever sketched by the central bank — illustrating the resilience of the banking system reducing as competition increases.

Competition ‘up’, resilience ‘down’.

Naturally, a chart like that needs some jargon to give it clout, so the achievable outcomes are marked by what Hawkesby labels the “Financial Stability Frontier”.

Outcomes that deliver the utmost resilience and the utmost competition are beyond the limits of the frontier, because there’s a trade-off — one that, by the way, the Reserve Bank would like to figure out for itself, thanks very much ComCom.

This may not be the last such memorising chart we see from the Reserve Bank.

As Hawkesby notes, it could be adapted to show the trade-off between resilience and either “innovation, efficiency or inclusion”.

All just by changing the word on the “X” axis.

Can’t wait.

Online comments are moderated during working hours and may not appear immediately.