With Orr gone, Willis sharpens case for relaxing bank capital rules

Tuesday, 11 March 2025

Finance Minister Nicola Willis is sending a strong message that she is minded to relax bank capital rules to promote economic growth, following the sudden resignation of Reserve Bank Governor Adrian Orr.

But she is declining to provide more clues on whether her recipe for faster growth could include company tax cuts.

Willis said on Tuesday that there could be a case for both rebalancing the risk weightings the Reserve Bank attaches to business lending and mortgage lending, to encourage the former, as well as a generalised relaxation of the rules, rather than just one or the other.

The Reserve Bank settled on a policy in 2019 of requiring banks to hold significantly more capital to back up their loans.

The goal was to make banks more resilient and reduce the chances of any falling over in the event of a major financial crisis.

Former governor Adrian Orr was understood to view the tighter rules as his most significant and potentially most enduring achievement at the bank.

But there have been persistent concerns the new rules are overkill and may have had the effect of unnecessarily increasing retail interest rates.

It has been widely speculated the Government’s desire to unpick the Reserve Bank’s reforms were the single biggest factor behind Orr’s sudden and as yet unexplained decision to quit last week.

But Willis again declined to confirm that today.

“Adrian Orr’s reasons for resigning are his own and for him to articulate,” she said.

Willis wrote to the Reserve Bank in December instructing it to “review risk-weighting for lending”.

But the bank’s chief economist, Paul Conway, played down the case for changes in an interview with The Post earlier this month, suggesting the cure for moribund business investment lay elsewhere.

“I don't think that tweaking risk weights here and there is going to be anywhere near the game-changer that's required to lift productivity and to lift capital intensity in the New Zealand economy,” Conway said.

A select committee inquiry under way into the banking industry has been separately hearing evidence from banks about the impact of the tougher capital requirements.

Willis said she was getting her own advice, but believed it was useful to have a “cross-party parliamentary examination” of the issues.

“These are long-run issues for the country and it has been my concern that we haven't always as a country considered the downstream implications of decisions that were taken by the Reserve Bank.

“I think there's a democratic issue here, which is that decision-makers in Parliament, elected by New Zealanders and accountable to New Zealanders, need to be confident that the prudential settings determined by the Reserve Bank don't get in the way of our economic and political objectives,” she said.

Asked whether the uncertainties created by recent geo-political events might have shown the Reserve Bank was justified in its changes and needed to be reflected in its bank capital rules, Willis said “we always need to allow for uncertainty”.

“But there are still relevant questions to address about whether that uncertainty needs to cater for a ‘one-in-100-year event’ or ‘a one-in-200-year event’.

“There are also relevant questions to consider about how New Zealand compares to other jurisdictions, and I think that having one of the most restrictive regimes in the world is not necessarily the best thing for New Zealand,” she said.

Willis said questions included whether that was stopping New Zealanders getting more affordable mortgages and stopping “our farms, our small businesses from getting the lending they need to grow”.

The answer to those questions is ‘yes’, and I'm really concerned about it,” she said.

Willis is now likely to be in the midst of planning for the May Budget, but declined to reveal whether company tax cuts might still be in the mix, after that emerged as a possibility last month.

“What I've said is that I want to see policies that support the New Zealand economy to grow and be more productive in the medium term. New Zealand has historically not had the wage increases that other economies have had,” she said.

“When you talk to economists about why that is, they point to things like the rate of business investment and the uptake of innovation and technology by our smaller firms and those are issues that I'm considering as we put together the Budget.”

The Budget planning will be taking place amid new concerns about the possibility of a recession in the United States, the world’s largest economy and New Zealand’s second-largest export market.

Willis said it was too soon to say whether a recession there would eventuate.

“We want to see America growing. We want to see the global economy growing. All of that matters for New Zealand, because we are a global trading nation,” she said.

“It's important that we position ourselves well. I'm given confidence by the fact that our export products are still getting record high prices, that we're exporting more. In fact, we're in the midst of an export-led recovery.”