NERA Letter to the Reserve Bank of New Zealand

22 October 2019
Kevin Counsell, Prof. Lewis Evans, James Mellsop

Senior Consultant Kevin Counsell, Affiliated Academic Prof. Lewis Evans, and Managing Director James Mellsop have published a letter to Adrian Orr, Governor of the Reserve Bank of New Zealand (RBNZ), regarding the potential impact of the RBNZ’s capital adequacy proposal to competition in financial services. The authors write that raising the costs of registered banks (by requiring them to hold more capital) would be unlikely to increase competition among them, but would likely encourage the expansion of non-banks, including shadow banks, as discussed in their May 2019 review of the RBNZ’s capital adequacy proposals. They also point to evidence that increased regulation of traditional banks has contributed to the rapidly growing market share of shadow banks, and that New Zealand shadow banks have a higher risk of failure than traditional banks. The authors hope that the RBNZ will take these concerns into consideration during its deliberations.