The Reserve Bank's new minimum core funding ratio (CFR) could be extended to dampen down excessive booms.
The central bank is in the process of phasing in its new prudential liquidity regime, aimed at requiring New Zealand banks to hold more funds.
The
The Reserve Bank’s new minimum core funding ratio (CFR) could be extended to dampen down excessive booms.
The central bank is in the process of phasing in its new prudential liquidity regime, aimed at requiring New Zealand banks to hold more funds.
The key part of this a minimum core funding ratio (CFR) which requires New Zealand banks to initially fund 65% of their loans from either retail deposits or long term wholesale funding. This ratio is being extended first to 70% and then 75% over the next two years.
The aim of the policy is to provide greater stability to the overall financial system and make it less vulnerable to the kind of liquidity shocks which hit the global financial sector in 2008-09.
However, the Reserve Bank’s latest Financial Stability report suggests the CFR could also be used as a monetary policy tool.
There could be “periodic adjustments” to the CFR, the report suggests.
“Thus, in a credit-based housing boom, the minimum CFR requirement could be raised, and then reduced to normal again once credit and housing pressures eased.”
This should not be tried, however, until it is clear how the current CFR requirements affects the market, the report says.
