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The Reserve Bank (RBNZ) has noted that the Loan Financing Program (FLP) it is designing for retail banks has few strings attached.
The RBNZ Monetary Policy Committee (MPC) last month he said ordered the central bank to be ready to implement an FLP before the end of the calendar year.
The aim of the plan, if implemented, would be for the RBNZ to provide retail banks with low-cost financing to enable them to lower interest rates. Having a new source of funding would make banks less dependent on obtaining funds from offshore sources and depositors. Banks could cut rates without worrying so much that this will deter depositors and therefore leave them with a funding gap.
Ultimately, the RBNZ would like support to flow through the economy, driving inflation and employment in line with its monetary policy mandate.
‘Any conditionality, you want to be simple’
Christian Hawkesby, RBNZ’s Lt. Governor and CEO for Economics, Financial Markets and Banking, updated the media Thursday on the progress the RBNZ was making on designing the scheme.
“You want it [the FLP] is available for free and you want it to be used, potentially on a large scale, to reduce financing costs so that [banks] you can pass it on, ”Hawkesby said.
“You want it to be as simple as possible. Any conditionality wants to be simple. You don’t want me to end up inhibiting the scheme [from] being used …
“If you design something that is too complicated, [and it] it becomes an exercise in excessive compliance, it just discourages banks from using it. I think that would be something we should carefully balance when we do the design. “
Hawkesby said the global experience was “mixed” when it came to central banks requiring retail banks to use funding for certain types of loans or to lend to certain sectors.
He said that more information on the design of the program will be released in the November 11 Monetary Policy Statement. He cautioned that this did not necessarily mean that the plan would be released the next day.
Could one FLP be enough?
Hawkesby said the FLP would not have to be used in conjunction with a negative Official Cash Rate (OCR), although the MPC believed such a program would make a negative OCR more effective.
“We could launch a FLP itself and see the impact it has on financing costs, how much is transferred, where the economy is,” Hawkesby said.
RBNZ chief economist and chief economist Yuong Ha emphasized that the decision on whether to lower OCR would continue to depend on the economic outlook.
When the RBNZ in March lowered the OCR to 0.25%, it said it would leave it there for at least a year.
Large or growing banks could borrow more through an FLP
Hawkesby said the interest rate at which banks would borrow through the FLP would be “around OCR,” so it could move accordingly.
When asked if limits would be placed on the amount of loans banks could borrow through the scheme, Hawkesby replied: “What you’ve seen internationally is that the limits are related to the size of the bank and its balance sheet to begin with. , and / or growing your bank balance. That could be one of the ways to incentivize more funds to be available if you’re expanding your balance. That’s one focus or one dimension.
“The other dimension is, do they have eligible guarantees to provide?”
Hawkesby said the RBNZ was still deciding how long the FLP would be available and on what terms the funds would be provided.
When asked how the FLP would eventually be lowered, he said: “Having a longer window means its use would be more amazing. [Banks] I wouldn’t feel compelled to turn it down right away. Having more diverse terms, that shakes the other extreme. “
Hawkesby declined to comment on the scale of the program, but said: “The bottom line is that it will be substantial in size.”
The RBNZ used this stylized graphic to illustrate how the FLP would work, if the MPC decided to implement it and also reduce OCR.
