The cost of Reserve Bank regulation

Roger Partridge writes:

A new submission to the Committee from banking experts Andrew Body and Simon Jensen provides fresh evidence of these costs. Their analysis shows the Reserve Bank’s capital rules add between 0.25 and 0.375 percentage points to mortgage rates compared with Australia. For a million-dollar mortgage, that means between $2,500 and $3,750 in extra annual interest payments.  

The Reserve Bank requires banks to hold enough capital to survive a one-in-200-year financial crisis. No other country sets such an extreme standard. Most aim for resilience against a one-in-100-year event. 

Making matters worse, the Reserve Bank keeps adding requirements to its conservative settings. Banks must now conduct climate-related stress tests and meet complex reporting obligations, even though the high capital requirements already protect against such risks. 

The central bank also requires banks to hold more capital against farm lending than Australian regulators. A New Zealand farmer faces higher borrowing costs than an Australian farmer, even though both sell into the same global markets. 

I’m increasingly of the view that the reserve Bank should have independence from the Government only for its monetary policy decisions around the OCR. However the financial regulatory decisions they make should either be shifted elsewhere such as the FMA or be subject to government approval so costs can be weighed by against benefits.