Financial Institutions and Markets
NZ Bank’s Standing by Nov 2019
According to the Reserve Bank of New Zealand (2019), all the financial systems in New Zealand are controlled and regulated by the Reserve bank. In other words, the reserve bank has the responsibility of managing and regulating other banks, financial markets, and insurers to ensure increased effectiveness and efficiency within the financial system. According to the statistics, 86 percent of lending occurring in New Zealand results from the four largest banks within the country. At the same time, the non- banking sector contributes to 3 percent of the lending. In the recent past, the Reserve Bank has greatly improved its performance on the financial system as indicated by 99 percent adult involved in receiving bank account.
Despite its high performance, banking performance has faced increased risks and challenges. For instance, in 2019, the banking sector experienced a global financial crisis risk. This risk has greatly affected the overall performance of the sectors, thus creating liquidity challenges. In the recent past, financial investors have faced increased losses due to the global financial crisis. In New Zealand, the majority of banks have faced the risk of initial contract breach.
In most cases, their banking sector is faced with liquidity ration and capital adequacy calculation errors. This move has negatively affected the banking sector, thus losing the trust of the investors. Lastly, the New Zealand banking sector has faced risks of lowering investment interest. In business, investors inject finance intending to earn more return. Therefore, lowering the interest rate reduces the yield opportunities, thus discouraging potential investors.
Opportunities and Threats in Low-interest environment for NZ Banks
The banking sector in New Zealand has faced several threats as a result of the low-interest environment. First, the low-interest environment leads to reduced bank margin. A study conducted by Brookes and Hampton (2000) indicated that a decline in interest rates from banks means that the bank deposits are less compared to lending rates, therefore, impacting the profitability of banks negatively, thus causing instability of banks. Generally, the low-interest environment has lowered the lending; accordingly, flattening the yield curve. Secondly, the low-interest environment has led to a reduction in the official cash rate. This affects the household negatively since it makes the household deposit sticky.
Despite the threats associated with the low-interest environment, several opportunities are originating from such an environment. For instance, the low-interest rate is characterized by increased profitability since the market ‘s asset valuation has been positively impacted by the decline in the interest rate. Secondly, the low-interest environment has allowed the banking sector to focus on other non-interest revenues opportunities as a way to remain competitive and productive in the market, as evidenced in different countries such as the US and Europe.
Negative OCR Rates
A study conducted by Brookes and Hampton (2000) indicated that the negative OCR means that banks pay reserve banks for holding money. For the case with New Zealand Banking sectors, several banks have become profitable as a result of non-interest revenues, thus indicating new breakthroughs. In my opinion, RBNZ should adopt negative OCR since it will make the banks avoid costly lending and pay reserve banks for holding money.
References
Reserve Bank of New Zealand (2019). Financial stability report 2019. https://www.rbnz.govt.nz//media/reservebank/files/publications/financial%20stability%20reports/2019/fsr-nov-2019.pdf
Brookes, A., & Hampton, T. (2000). The official cash rate one year on. Reserve Bank of New Zealand Bulletin, 63(2), 53-62.