Bank capital proposals and future financial crises
How sound is the Reserve Bank's plan to reduce the risk of financial crises? Not very, argues banking consultant Ian Harrison.
The Reserve Bank has argued that a large increase in bank capital requirements is required to reduce the risk of a financial crisis to 1 in 200 years. They have suggested that the cost to borrowers and depositors will be minimal. Banking consultant Ian Harrison has looked at the assumptions underlying this projection, and in this IGPS public seminar he presents his conclusions: an informed, rational member of the public would not buy the insurance policy the Reserve Bank is attempting to sell us.
The costs - a present value of around $30 billion on the Bank’s own calculations - are substantial. The Bank’s new risk tolerance approach, which ignores these costs, is a backward step for policy analysis. The Bank has blundered by not considering the implications of foreign ownership of the New Zealand banking system. Having more capital in New Zealand will not avert a financial crisis if the parent fails.
- Speaker: Ian Harrison had a long career at the Reserve Bank, and in recent years has been consulting, primarily to the banking industry. In his time at the Reserve Bank Ian played a central role in developing an analytical approach to financial system risk issues.