In the latest Reserve Bank Bulletin, macro financial department adviser Lamorna Rogers said the tools could address build-up of systemic risk in the financial system and provide buffers for financial institutons. But the system was still a work in progress.
She said the bank started to investigate the tools during the global financial crisis. As its work progressed, it moved from a focus on the financial system’s shock-absorbing capacity to a more ambitious approach to reduce the extremes of the financial cycle.
The Bank was keen on tailoring its instruments to particular problems, she said. Changes to the core funding ratio or the counter-cyclical buffer would affect banks’ balance sheets as a whole while sector capital requirements and LVR restrictions could be used to crack down on certain sectors, such as agriculture or property investors.
Rogers said: “A toolkit which includes a variety of instruments – two capital-based and the others related to funding and lending shares – also has the advantage of diversifying the ways in which the Reserve Bank can respond to a build-up in system risk.”
She said there was still a lot of uncertainty about the best and most effective way of using macroprudential tools. “Reserve Bank will be ‘learning-by-doing’ to some extent, as well as drawing on a growing body of international experience and research. We do not see macro-prudential instruments as ‘set and forget’ tools; once deployed, there will be on-going assessments of their effectiveness, which will condition their use and their eventual release.”
