Treasury misses out on say in RBNZ's new toolkit, documents show

Monday 10th June 2013

The Treasury missed out on getting a say on how the Reserve Bank will roll out its new tools to take the steam out of potential asset bubbles, after pushing for at least a passive role, according to documents published on the department's website.

The government's financial adviser wanted an ongoing role in the use of the macro-prudential tools because the Crown could be at risk of any "large externalities arising from failure to mitigate system risk" and that any future tools could involve taxes or other regulatory levers, Treasury officials Renee Philip and Vinny Nagaraj said in a draft background paper in July last year.

The officials said some ministers had expressed concerns about how the tools would be used, and what checks and balances the government would have available to it, the report said.

While not wanting to impose on the Reserve Bank's turf, the officials recommended a policy agreement between the central bank governor and Minister of Finance to make a direct line of accountability.

They also wanted to establish a joint information committee which would let the Treasury and Reserve Bank talk regularly about the tools. The report said there were differing opinions on how much involvement the Treasury should have, which officials thought would be mitigated by the joint committee.

A third recommendation was withheld, citing the convention to protect confidential advice between ministers and officials.

The advice was ultimately ignored, with Finance Minister Bill English siding with the Reserve Bank's preference of signing a memorandum of understanding between the governor and minister that leaves the central bank to make a policy decision independently, though keeping the Beehive and Treasury abreast of what's going on.

The agreement was signed off for the May 16 budget, granting governor Graeme Wheeler the ability to require lenders to hold more capital on their balance sheets against certain assets, or restrict the level of low-equity home loans.

The final copy was largely the same as a draft from the central bank in December, dropping a sub-clause on potential restrictions of high loan-to-value ratio lending to let the bank set capital requirements for housing loans according to LVRs.

It also tweaked a line on the operation of the instruments to say "Macro-prudential instruments do not replace conventional prudential regulation but may be used from time to time to help manage the risks associated with the credit cycle."

The central bank originally said "Macro-prudential instruments are however expected to be used infrequently, and typically for large credit and asset price cycles."

The Treasury's final advice to the minister on May 7 this year said the MoU "would be in the spirit" of the desired goals to keep central bank independence, without losing appropriate oversight.

The department said measuring the success of the tools will be difficult, and there might be "some merit in looking at whether the single decision making framework is most suitable in this context."

BusinessDesk.co.nz

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