Government and Opposition put heat on Reserve Bank over business lending

Tuesday, 28 January 2025

Risk-weightings applied by the Reserve Bank when working out how much capital banks should have on hand have long been a bone of contention.

Labour finance spokesperson Barbara Edmonds has joined the Government in suggesting the risk-weightings the Reserve Bank gives to different types of lending may need to be reviewed, to encourage growth.

The Reserve Bank is responsible for determining how much capital banks should hold to support their loans.

Its rules mean they need to have more capital on hand to back each dollar of lending to businesses than each dollar of mortgage lending.

The policy is designed to reflect a view that some types of lending are riskier than others, but has the effect of pushing up interest rates on business loans when compared with mortgage rates.

The weightings have periodically been blamed for encouraging investment in property at the expense of more productive activities.

Prime Minister Christopher Luxon referenced the issue in a statement to Parliament on Tuesday.

The Government had directed the Reserve Bank to “review risk-weighting for lending” in a letter of expectations Finance Minister Nicola Willis sent to the bank in December, he noted.

Willis said in that letter that it would be desirable for the Reserve Bank to consider how risk-weight settings affected competition and “investment in a productive economy”.

Labour finance spokesperson Barbara Edmonds (above) and Nicola Willis continued to fire barbs at each other despite seeming to find some common ground.

In perhaps her most explicit comment, Willis told The Post on Tuesday that changing the risk weightings the Reserve Bank gave to business and home lending to better support economic growth was “worthy of consideration”.

Edmonds said businesses were telling her access to capital was inhibiting growth.

The Reserve Bank’s rules were designed to safeguard the stability of the financial system, but should be looked at, she said.

The Government should have prioritised improving businesses’ access to capital over other growth initiatives such as “tinkering” visa changes announced on Monday to encourage ‘digital nomads’ to work remotely from New Zealand, she said.

Government policies were also still incentivising investment into the “non-productive economy”, for example by watering down the ‘bright line test’ that determines whether profits on property investments are subject to tax, Edmonds said.

Willis rejected Edmonds’ criticism that the Government was giving too little priority to business banking reforms.

“I'm pleased that Labour has joined the party. That's a change of tune from her leader who said this year wasn't the year for new ideas,” Willis said.

Infometrics economist Brad Olsen said one of the difficulties involved in reviewing risk-weightings was that the Reserve Bank was charged with maintaining financial stability.

“Agricultural loans, and business loans to a degree, are generally seen to be riskier than a home loan and although that frustrates a lot of people, I think there's often a good reason for it.

“You wouldn't want to see the bank change risk ratings because the government reckoned they wanted a bit more growth in any given year.”

It would take a “substantial, broad change in the economy” to see a large number of people completely unable to afford their home loans, Olsen said.

“For the likes of agricultural loans, you have a bad season or two, and all of a sudden you've got some pretty stonking loans and no ability to pay for them.”

Olsen said he hadn’t heard a compelling argument that the Reserve Bank’s risk-weighting were “fundamentally out of whack and restricting growth to a degree that was completely out of line with the need to maintain financial stability”.