The Reserve Bank of New Zealand and its governor, Alan Bollard, have raised doubts over the usefulness of the countercyclical buffer proposed under the Basel III global banking framework.
In a speech to an IIR conference in Sydney on Friday, Bollard outlined RBNZ research suggesting the countercyclical buffer on its own would have little effect on a credit boom.
The research, now public, suggests the buffer and similar "macroprudential" tools would have no more effect than a 50 basis point increase in the official NZ cash rate.
Under Basel III's countercyclical buffer, regulators can insist banks hold up to 2.5 per cent of extra Tier 1 capital at times of high credit growth. The precise conditions for triggering the buffer are still being negotiated, though it is expected to be invoked only once every 20 years or so in a given national market.
The countercyclical buffer and other such "macroprudential" tools aim to reduce risk across the financial system by lifting capital across the industry. (Existing "microprudential rules, in contrast, aim to reduce risk in individual institutions.) Supporters of macroprudential tools believe they could play a key role in preventing or moderating a new global financial crisis in the decades ahead.
Bollard said regulators "do need to keep preparing for how we might deal with credit and asset price booms when they recur in the future."
And, he said, macroprudential instruments might help bolster financial system resilience and possibly moderate credit cycles. As well as a countercyclical buffer, possible tools included credit-based measures, accounting tools and liquidity instruments.
But he warned of the need for realistic expectations about the results. He said RBNZ calculations suggested a countercyclical buffer "would have only a small dampening effect on the upswing of the credit cycle, through its effect on the cost of funds, unless one makes extreme assumptions about the size of the countercyclical buffer or the market cost of capital."
The RBNZ held a workshop on macroprudential policy last Monday. Its centrepiece was a
detailed and unenthusiastic assessment of macroprudential tools by the RBNZ's Yuong Ha and Bernard Hodgetts.