The New Zealand Government, retail banks and the Reserve Bank are today announcing a major financial support package for home owners and businesses affected by the economic impacts of COVID-19.
The package will include a six month principal and interest
payment holiday for mortgage holders and SME customers whose incomes have been
affected by the economic disruption from COVID-19.
The Government and the banks will implement a $6.25 billion
Business Finance Guarantee Scheme for small and medium-sized businesses, to
protect jobs and support the economy through this unprecedented time.
“We are acting quickly to get these schemes in place to
cushion the impact on New Zealanders and businesses from this global pandemic,”
Finance Minister Grant Robertson said.
“These actions between the Government, banks and the Reserve
Bank show how we are all uniting against COVID-19. We will get through this if
we all continue to work together.
“A six-month mortgage holiday for people whose incomes have
been affected by COVID-19 will mean people won’t lose their homes as a result
of the economic disruption caused by this virus,” Grant Robertson said.
The specific details of this initiative are being finalised
and agreed urgently and banks will make these public in the coming days.
The Reserve Bank has agreed to help banks put this in place
with appropriate capital rules. In addition, it has decided to reduce banks
‘core funding ratios’ from 75 percent to 50 percent, further helping banks to
make credit available.
We are announcing this now to give people and businesses the
certainty that we are doing what we can to cushion the blow of COVID-19.
The Business Finance Guarantee Scheme will provide
short-term credit to cushion the financial distress on solvent small and
medium-sized firms affected by the COVID-19 crisis.
This scheme leverages the Crown’s financial strength,
allowing banks to lend to ease the financial stress on solvent firms affected
by the COVID-19 pandemic.
The scheme will include a limit of $500,000 per loan and
will apply to firms with a turnover of between $250,000 and $80 million per
annum. The loans will be for a maximum of three years and expected to be
provided by the banks at competitive, transparent rates.
The Government will carry 80% of the credit risk, with the
other 20% to be carried by the banks.
Reserve Bank Governor Adrian Orr, said: “Banks remain well
capitalised and liquid. They also remain highly connected to New Zealand’s
business sector and almost every household in New Zealand. Their ability to
extend credit to firms to bridge the difficult times created by COVID-19 is
critical and made more possible with today’s announcements. We will monitor
banks’ behaviour over coming months to assess the effectiveness of the
risk-sharing scheme.”
The Government, Reserve Bank and the Treasury continue to
work on further tailor-made support for larger, more complex businesses, Grant
Robertson said.
A further announcement from the Reserve Bank NZ today. They have established a Term Auction Facility to support the markets/banks, FX swap funding, and a $30bn US Swap line from the Fed. They also removed the credit tiers for ESAS account holders. All signs of Central Bank support for the financial plumbing.
New Zealand’s financial system remains sound, with strong capital and liquidity buffers.
Assistant Governor Christian Hawkesby said
the Reserve Bank is actively involved in financial markets to ensure
smooth market functioning despite the global uncertainty from COVID-19.
Regular market operations continue to ensure there is ample liquidity in
the financial system.
“The measures we are implementing today
provide additional support to domestic financial markets. We will ensure
our operations make financial markets operate smoothly,” Mr Hawkesby
said.
“We are working in tandem with the banks, the wider financial market community, and the Government.”
The provision of term funding
The Term Auction Facility (TAF) is a
program that will alleviate pressures in funding markets. The TAF gives
banks the ability to access term funding, with collateralised loans
available out to a term of 12 months.
Banks currently have robust liquidity and
funding positions and can manage short-term disruptions to offshore
funding markets. The opening of the TAF will provide confidence that the
Reserve Bank stands ready to support the market if needed. Further
operation details on the TAF are available in a Domestic Markets media release.
Providing funding in FX swap markets
The Reserve Bank is providing liquidity in the FX swap market, to ensure
this form of funding can be accessed at rates near the Official Cash
Rate (OCR). This activity will increase in the weeks ahead to support
funding markets.
Re-establishment of a USD swap line
The Reserve Bank has re-established a temporary USD swap line
with the US Federal Reserve. This will support the provision of USD
liquidity to the New Zealand market, in an amount up to USD 30 billion.
This is a facility that is being offered to many other central banks
globally.
Supporting liquidity in the New Zealand government bond market
The Reserve Bank has been providing liquidity to the New Zealand government bond market to support market functioning.
Ensuring a robust monetary policy implementation framework
To support the implementation of monetary
policy, the Reserve Bank is removing the allocated credit tiers for
Exchange Settlement Account System (ESAS) account holders. This change
means that all ESAS credit balances will now be remunerated at the OCR.
Under the previous framework, banks were charged a penalty rate on
deposits of cash balances above their allocated credit tiers.
The removal of credit tiers for ESAS
account holders will provide additional flexibility for the Reserve Bank
in its market operations, by keeping short-term interest rates anchored
near the OCR regardless of the level of settlement cash in the system.
This framework for monetary policy implementation (i.e. a floor system)
is common among other central banks overseas.
The Reserve Bank will continue to monitor
the use of our liquidity facilities and ESAS settlement accounts. We
anticipate that liquidity will continue to be distributed efficiently
throughout the banking system. If not, we will review our framework for
monetary policy implementation as needed.
A commitment to market functioning
The Reserve Bank has a number of tools to
provide additional liquidity and the ability to increase the size of
operations where needed. We are committed to using these to support
smooth market functioning.
In addition to the tools listed above, the Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
Mr Hawkesby reiterated that the Reserve
Bank continues to monitor developments, and remains ready to act further
to ensure markets and the financial system operate in a stable and
efficient manner.
The Reserve Bank of New Zealand, Te Pūtea Matua, is taking
proactive steps to ensure it is well positioned to effectively and efficiently
manage New Zealand’s monetary policy in an environment of very low interest
rates.
In a speech launching its Principles on Using Unconventional Monetary Policy,
Reserve Bank Governor Adrian Orr said as kaitiaki (caretakers) of Te Pūtea
Matua, the Bank’s activities involve continuous assessment of our monetary
policy framework, including the most effective tools and their best
application.
Mr Orr said the Reserve Bank
has not, and still does not, need to use alternative monetary policy
instruments to the OCR, but it is best to be prepared.
“An inability to predict
what might happen next is no excuse for not preparing for what could happen.
That’s true for businesses, governments and central banks. It is in light of
both economic theory and recent global experience that we have been assessing
what alternative monetary policy tools may be available to the Reserve Bank of
New Zealand – and their relative desirability. We are fortunate, unlike many
other OECD economies, to have the time to prepare for such possible needs.”
The Reserve Bank typically implements monetary policy by controlling the Official Cash Rate but as interest rates fall, this tool could be pushed to its limit in the future. Given this, in recent years, the Reserve Bank has been considering the unconventional monetary policy tools and policy framework that it would use to meet its policy targets.
The work to develop the
Reserve Bank’s preparation for unconventional monetary policies has involved:
Identifying the suite of possible ‘unconventional monetary policy tools’ available to the Reserve Bank;
Defining and making explicit the criteria the Reserve Bank would use to assess these tools, against both each other and also alternative policies all together (e.g., fiscal policy options);
Considering the relative benefits and costs of the tools, so as to operate on a ‘least surprise’ basis, and to ensure the Reserve Bank works in collaboration and with the agreement of fiscal authorities;
Considering not just the monetary policy efficacy of the tools, but also broader considerations related to our financial stability and efficiency mandate; and
Ensuring the tools are actually able to be utilised, including working with the important financial institutions that make up our system.
“We are confident of our
success in assessment and implementation, but we are also aware that these
tools work best when supported by wider stabilisation policies and additional
macroprudential considerations. In the event we ever had to use these
unconventional tools, our goal would be to ensure a strong and sustained
increase in economic activity, with inflation expectations remaining
well-anchored on our target mid-point.”
In the coming weeks the
Reserve Bank will release a series of technical papers explaining the tools in
more detail, examining their pros and cons, and outlining how they would
potentially be used.
Note:
The principles and speech do
not discuss current economic conditions or the Reserve Bank’s outlook for the
Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25.
The Bank remains prepared in
its business continuity role to ensure a well-functioning financial system,
including ongoing consumer and business access to credit and cash, liquidity to
the banking system and a stable payments and settlements system.
REINZ has released their January 2020 residential report today, and they reported the busiest January in 4 years. The annual average rise across New Zealand was 7%, with Auckland at 4.4% and other areas up 9.1%. Auckland is actually now among the faster-rising regions. Prices in Canterbury are rising, although to date this has been slower than many other regions.
In January the median number of days to sell a property nationally decreased by 6 days from 48 to 42 when compared to January 2019 – the lowest days to sell for the month of January in 3 years.
Low interest rates and lighter regulation are driving the market. Over 2019, the RBNZ cut the OCR from 1.75 percent to 1 percent and they indicate that the OCR will remain at 1 percent for some time. In response, household debt continues to rise. Lower debt servicing costs enables higher household spending on consumption, although returns from savings will be lower as well.
Over the past year New Zealand construction activity has ramped up substantially while net migration has steadily declined. The cancellation of earlier plans to introduce a capital gains tax has also helped to drive the market.
For New Zealand excluding Auckland, the number of properties sold increased by 0.9% when compared to the same time last year (from 3,279 to 3,308) – also the highest for the month of January in 4 years.
In Auckland, the number of properties sold in January increased by 9.7% year-on-year (from 1,180 to 1,295) – the highest number of residential properties sold in the month of January since January 2016.
Sales in Auckland were the highest for the month of January in four years, with particularly strong uplifts in sales volumes in North Shore City (+29.0%), Waitakere City (+28.6%) and Rodney District (+21.1%).
Regions outside Auckland with the highest percentage increase in annual sales volumes during January were: • Nelson: +42.6% (from 54 to 77 – 23 more houses) • Manawatu/Wanganui: +15.3% (from 281 to 324 – 43 more houses) – the highest for the month of January in 3 years • Bay of Plenty: +11.5% (from 340 to 379 – 39 more houses) – the highest for the month of January in 4 years • Marlborough: +11.3% (from 62 to 69 – 7 more houses). Regions with the largest decrease in annual sales volumes during January were: • Tasman: -29.3% (from 58 to 41 – 17 fewer houses) – the lowest since January 2017 • Southland: -27.2% (from 151 to 110 – 41 fewer houses) – the lowest for the month of January in 6 years • Otago: -17.1% (from 269 to 223 – 46 fewer houses) – the lowest for the month of January in 9 years.
In the recent Reserve Bank NZ Monetary Policy Statement, they indicated that over the medium term, annual house price inflation is expected to slow as net immigration moderates, residential construction activity remains high, and the effects of past lower mortgage rates fade.
However, they expect residential investment growth is expected to pick up over the next six months, in line with recent high levels of residential building consent issuance. That said, residential investment is forecast to decline very gradually as a share of GDP later in the projection period, reflecting ongoing capacity constraints in the construction sector.
In December 2019, the Government announced a substantial investment package of $12bn, equivalent to around 4 percent of annual nominal GDP. The Treasury forecasts that $8.1bn will be spent between June 2020 and June 2024, mainly on infrastructure projects
Which is probably just as well, given that business investment is forecast to fall ahead.
Financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient over the longer-term, Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report.
International risks to the
financial system have increased. Global growth has slowed amid continued
uncertainty about the outlook for world trade. This has resulted in reductions
in long-term interest rates to historic lows, including in New Zealand. While
necessary to maintain near-term inflation and employment objectives, prolonged
low interest rates can promote excess debt and investment risk-taking, and
overheat asset prices, Mr Orr says.
Mr Orr noted that the Reserve Bank’s Loan-to-Value Ratio (LVR) restrictions have been successful in reducing the more excessive household mortgage lending, thereby improving the resilience of banks to a significant deterioration in economic conditions.
But, there remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending. As such, we have decided to leave the LVR restrictions at current levels at this point in time.
Mr Orr says the Reserve Bank
is committed to bolstering the long-term resilience of the financial system.
“Strong bank capital buffers are key to enabling banks to absorb losses and
continue operating when faced with unexpected developments. The Reserve Bank
has proposed increasing these buffers further with final decisions on the
Capital Review proposals to be announced on 5 December.”
Deputy Governor Geoff
Bascand says good governance and robust risk management processes within
financial institutions are important to maintain long term resilience. Our
recent reviews of banks and life insurers, and the number of recent breaches in
key regulatory requirements, reinforces the need for financial institutions to
improve their behaviour.
“We are engaging with
industry to ensure that they strengthen their own assurance processes and
controls. We have also reviewed our own supervisory strategy and will be taking
a more intensive approach, which will involve greater scrutiny of institutions’
compliance,” Mr Bascand says.
“Some life insurers have low
solvency buffers over minimum requirements. Recent falls in long-term interest
rates are putting further pressure on solvency ratios for some of these
insurers. Affected insurers are preparing plans to increase solvency ratios and
are subject to enhanced supervisory engagement. This highlights the need for
insurers to maintain strong buffers, and insurer solvency requirements will be
reviewed alongside an upcoming review of the Insurance (Prudential Supervision)
Act.”
Westpac New Zealand Limited (Westpac) has retained its
accreditation as an internal models bank following completion of an extensive
remediation process required by the Reserve Bank.
In 2017 the Reserve Bank
required Westpac to undertake an independent review of its compliance with
internal models obligations. The review found that Westpac was using a number
of unapproved models and that it had materially failed to meet requirements around
model governance, processes, and documentation.
The Reserve Bank imposed a
precautionary capital overlay in light of the regulatory breaches, and gave
Westpac 18 months to remedy the failures or risk losing its accreditation as an
internal models bank.
Deputy Governor Geoff
Bascand says that following the remediation process, Westpac is now operating
with peer-leading processes, capabilities and risk models in a number of areas.
“Westpac has taken the
findings of the independent review as an opportunity to make meaningful
improvements to its risk management, and we commend it for its co-operative and
constructive engagement in working with Reserve Bank over the remediation
period.
“The changes that Westpac
has made to its internal processes, governance and resourcing, as well as a
suite of new credit risk models for which it has sought approval, have given us
confidence in its capital modelling and compliance and satisfied us that it now
meets the internal models bank standard.
“Looking forward, we will continue
to hold all internal model banks to the same high standards.”
Internal models banks are
accredited by the Reserve Bank to use approved models to calculate their
regulatory capital requirements. Accreditation is earned through maintaining
high risk management standards, and comes with stringent responsibilities for
the bank’s directors and management.
Banks are required to
maintain a minimum amount of capital, which is determined relative to the risk
of each bank’s business. The way that risk is measured is important for
ensuring that each bank has an appropriate level of capital to absorb large and
unexpected losses.
The Reserve Bank will amend
Westpac’s conditions of registration from 31 December to remove the two
percentage point overlay applying to its minimum capital requirements.
As a condition of retaining
its accreditation Westpac will need to satisfy several ongoing requirements,
which it has committed to resolving, Mr Bascand says.
The Reserve Bank of New Zealand (RBNZ) and Financial Markets
Authority (FMA) today released their findings on life insurers’ responses to
the joint Conduct and Culture Review.
Overall, the regulators were
disappointed by the responses. Significant work is still needed to address the
issues of weak governance and ineffective management of conduct risk,
identified in the regulators’ report earlier this year.
Rob Everett, FMA Chief
Executive, said: “While we’re disappointed, we’re not surprised as the
responses confirm what we found in our original review. It’s clear that
progress has been slow and not as far-reaching as required.
Some providers have started
work to identify the customer and conduct issues they face, others have not
provided any detail on this.”
Sixteen life insurers were
asked to provide work plans outlining the steps they will take to improve their
existing processes and address the regulators’ findings and recommendations.
There was wide variance in
the comprehensiveness and maturity of the plans provided.
Adrian Orr, Reserve Bank
Governor, said, “We’re disappointed the industry’s response has been
underwhelming. The sector has failed to demonstrate the necessary urgency and
prioritisation, around investment in systems, to provide effective governance
and monitoring of conduct risk.”
There was also a wide
variance in the quality and depth of the systematic review of policyholders and
products. Some did not complete this exercise and others did not provide data
on the number of policyholders affected or the estimated cost of remediation
activities. Insurers that completed the exercise identified at least 75,000
customer issues requiring remediation, with a value of at least $1.4 million.
Some of the new issues identified included:
Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths
Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits
Poor value products were identified, where premiums charged were not fair value for the cover provided.
Sales incentives and
commissions
The FMA and RBNZ committed
to report back on staff incentives and commissions for intermediaries. Previous
reports by the FMA reflected the concerns with conflicted conduct associated
with high up-front commissions and other forms of incentives, (like overseas
trips) paid to advisers.
Although some insurers have
committed to removing sales incentives for employees and their managers, not
all committed to removing or altering indirect sales incentives.
Those providers that have
removed sales incentives for employees don’t typically use external advisers to
distribute products. Providers using external advisers told the regulators that
changing long-held business arrangements and distribution models is difficult
and will take time to implement.
Mr Everett said, “We’re
ready to work with life insurers to ensure they prioritise their focus on
serving the needs of their customers, while at the same time balancing the need
to remunerate advisers for the important work they do to help these customers.
But we do not think high up-front commissions create confidence that insurers
and advisers are acting in the best interests of customers.”
Mr Orr said, “Good
governance within insurance firms requires the effective management of conflicts
of interest. We need to see much better systems and controls in place to manage
the inherent conflicts where advisers or sales staff are offered incentives to
sell or replace insurance policies.”
Next steps
Those companies that have
not undertaken comprehensive systematic reviews of policyholders and products
have been asked to complete further reviews of their systems to identify
issues, and to develop mature plans to respond and remediate any of their
findings. These plans must be completed by December 2019.
The FMA and RBNZ will
continue to monitor how the insurers are responding to recommendations and
implementing their work plans. Life insurers are currently not legally required
to become more customer-focused and the FMA and RBNZ found that the sector has
a weak appetite for change.
Deficiencies in some of the
plans received, and some insurers’ lack of commitment to implementing the
regulators’ recommendations, further demonstrates the need for additional
obligations to be included in the regulation of conduct of life insurers.
There is an interesting paper the Reserve Bank NZ has put out, seeking comments by 31 August. The Future of Cash Use. It was issued in June 2019.
The paper describes the transition to digital alternatives, and explains some of the reasons. But what caught my eye was this section. “All members of society will lose the freedom and autonomy that cash provides, be more exposed to cyber threats, and lose the ability to use cash as a back-up form of payment”. And “other activity in the shadow economy is unlikely to be affected by the disappearance of cash as people find other ways to circumvent the law”.
So two points, New Zealand followers you might want to read the paper, and make a submission – not been much publicity so far.
Those following the DFA campaign relating to the War on Cash in Australia, here is more evidence that the proposal to ban cash transactions above $10,000 will not achieve their stated aims – but of course there is a wider monetary policy objective, as we have discussed.
6 Considerations arising from having less cash in society
Given the trends in cash demand and the cost pressures on the
commercial supply of cash in New Zealand, it is possible that cash will
become less widely available or used in the medium to long term. The
effects of less cash in society would be felt more keenly by certain
groups of people who rely on cash and for whom no practicable substitute
exists. The severity of these impacts would be worsened if the
transition to a society with less cash acceptance occured before
mitigating measures could be put in place. Further, the size of the
affected groups might not be large enough to motivate cash providers to
ensure future cash availability, but the size might also not be
negligible.
This section summarises the information in table 1 and Appendix A and
the issues that should be considered if cash use and availability
decline.
Issue 1: People who are financially or digitally excluded could be severely negatively affected.
Cash provides access to the financial system for those who face
barriers to financial inclusion. Further, in a society with less cash,
barriers to digital inclusion could become barriers to financial
inclusion.
Barriers to financial inclusion include limited access to the
banking system due to either a lack of trust in online security, skill
or motivation to use online financial platforms, or banking
restrictions. People who are not banked or have limitations to accessing
the banking system tend to be people without identification and proof
of address, people with convictions, people with poor credit histories,
people with disabilities, illegal immigrants and children.Elderly people
typically rely more than others on cash as a form of payment.
This could be due to low trust in online payments, low ability or
low motivation to learn new payment techniques. People with physical
disabilities, such as sight or intellectual impairments, might also find
cash a useful form of money. Children are also subject to financial
exclusion as banks do not issue debit cards to children under the age of
13. Further, New Zealand banks have full discretion in the customers
they service. This means that some people who do not meet certain bank
policies cannot obtain or keep accounts with those banks. Appendix A
describes additional groups that rely on cash rather than digital money.
Barriers to digital inclusion include insufficient internet
coverage, affordability constraints for technology hardware or data
plans, lack of skills, lack of confidence and low motivation to use
digital platforms. For example, even if people have access to the
internet they might not be motivated to upload personal details to an
online bank account due to privacy concerns.
Issue 2: Tourists, people in some Pacific islands and people who use
cash for cultural customs might be negatively affected if they cannot
use substitutes.
Tourists
Currently most tourists use cash as a reliable and easy-to-use form
of payment. Reserve Bank research has revealed that cash is typically
issued to Auckland and overseas and sent back to the Reserve Bank from
the South Island. This movement is likely due to the movement of
tourists. Many retailers in New Zealand do not accept credit cards (or
contactless payments) due to their higher interchange fees, preferring
instead to accept debit and EFTPOS cards (which require a New Zealand
bank account) that incur much lower costs for the retailers.We
are not aware of the extent to which inbound tourists’ own financial
services’ fees or portability, or their prior understanding of
transacting in New Zealand, influence this behaviour.
As per Appendix A, tourist access to payments in New Zealand could be
met by overseas-issued debit cards if cash were not available. Further,
competition might cause some retailers to accept tourist credit cards
despite higher interchange fees if cash was not available. Bounie et al
(2015) show that higher competitive pressures (the threat of losing
sales) increase the probability that a retailer will accept credit card
payments despite the higher costs.
Even if electronic payment alternatives were reliable, tourists might
be disadvantaged due to language and cultural barriers that create
actual and perceived barriers to payments in New Zealand. Further,
tourists might be particularly vulnerable to risks of robbery or loss
of payment cards if they could not rely on cash as a back-up payment.
Pacific Islands
Niue, the Cook Islands and Tokelau rely on New Zealand banknotes and
coins for their physical currency. The size of these island economies
has been thought to be a contributing factor to their use of New Zealand
currency. In addition, these islands are formally defined as states in
free association within the Realm of New Zealand. New Zealand banknotes
are also used in the Pitcairn Islands.
The Reserve Bank does not have a formal arrangement to supply these
economies with banknotes and coins. The supply of banknotes and coins to
these islands is facilitated by commercial providers, tourists, and
transfers from families. There are no ATMs on Niue and Tokelau. The Cook
Islands has two ATM providers and also issues its own banknotes and
coins. These islands also have access to digital money as in New
Zealand.
Cultural customs
New Zealand’s banknotes have been referred to as the country’s
business card. The designs on the notes represent many of our cultural
icons and contribute to our national cultural identity. Cash is also
used in many cultural customs in New Zealand. Some cultures that use
cash as gifts in traditional ceremonies might find that part of their
cultural identity is lost if they can no longer access cash easily. For
instance:
A Chinese custom is to give cash to junior family members and
friends during celebrations including New Year (Hoong Bouw — giving
money in red envelopes), at funerals, and during tea ceremonies in
traditional Chinese culture.
Some cultures have a wedding money dance where cash is gifted to
the bride and groom as they dance (the Philippines’ Saya ng Pera, and
the Taualuga in Samoa, Tonga and Western Polynesia).
Western cultures give coins to children who lose their baby teeth (Tooth Fairy).
Issue 3: All members of society will lose the freedom and autonomy
that cash provides, be more exposed to cyber threats, and lose the
ability to use cash as a back-up form of payment.
If cash use and availibility were to decline, an issue for all
members of society could be the loss of freedom that cash provides in
terms of autonomous spending and wealth stores, privacy, ability to live
off the grid, and ability to avoid the banking system. This could
result in a significant loss of social freedom in aggregate and
increased cyber security risks (leading to an increase in national
security risks). Lastly, society would lose the benefit of cash as a
‘back-up’ form of payment, although the usefulness of cash in this role
is limited.
Reduced freedom
Cash is anonymous, so provides consumers with autonomy or discretion
in how they choose to spend their money or store their wealth. The
feature of full anonymity creates personal and societal freedom and has
not been replicated in digital currencies. There are three elements in
this freedom; the first relates to the desire for privacy in making
transactions, the second relates to the desire to avoid banks or
government regulation, and the third relates to exposure to cyber-crime.
First, cash payments and balances cannot easily be traced. Central
agents and third parties (such as banks and governments) cannot easily
intervene or stop cash payments outside the banking system. This is a
unique feature of cash and is not fully replicated by any other form of
money. This anonymity gives people full control of and discretion with
their finances. Independent bank accounts could provide personal
freedoms but they are not always available or sufficient. For example,
individuals who are in abusive and controlling circumstances might
benefit from cash as it is easier to obtain and hide when other personal
freedoms are restricted.35
Additionally, people might feel that they benefit from the choice of
using an anonymous form of payment if it were ever needed.
However, the difficulty in tracing cash makes it relatively more
vulnerable to theft, accidental losses and fraudulent payments
(inadvertently accepting counterfeit notes). For this reason, some argue
that people would be better off with a partially anonymous form of
payment, where only the minimum information is given regarding the
identity of the payer and payee in each transaction, but each
transaction is recorded. These payments include, for example, vouchers,
and prepaid gift (debit or scheme) cards.36
Second, the offline and anonymous features of cash enable people to
separate their transactions and stores of wealth from the banking system
and some government interventions. There are legitimate motivations for
this separation.
There is currently no guarantee of the safety of bank deposits in New Zealand.37
Banks take household and business deposits and lend them to borrowers
— there is a risk that borrowers might not be able to service their
debts. Households and businesses could lose their deposits if banks were
engaging in overly-risky lending or if a severe series of events
occurred and many loans were not repaid.
People might also want to remove their savings from the banking
system if the Reserve Bank charged negative interest rates to stimulate
the economy. Cash provides an avenue for people to avoid this form of
government intervention or any other government intervention that might
occur in the future, such as capital controls.
Relatedly, people might want to store wealth outside the banking
system if they have low fundamental trust in banks or the government.
Examples are individuals who have immigrated to New Zealand from
countries where trust in the financial system is low, or where
government appropriations of assets were not uncommon. If there were
less cash in society, individuals would lose their privacy and autonomy
from government in the sense that all their transactions and savings
would be fully traceable if permitted by law.
Third, storing and transacting in cash reduces exposure to
cybercrime, such as financial losses and identity fraud. On a societal
level, New Zealand might be more exposed to cybercrime such as
state-funded cyber threats if it were totally reliant on the banking
system and digital money for all transactions and savings. On a personal
level, some people might prefer to keep their identities and finances
offline due to cyber concerns.
The loss of freedom in society in the above three areas could result
in demand for a form of digital currency issued by the central bank that
replicates some of the autonomy of cash. There are other assets in
which people could store their wealth that are offline and removed from
the financial system, for example, commodity assets and property.
However, these are more difficult to transform into spendable money and
can come with a different set of risks including fluctuating values.
Therefore, people might demand a central bank digital currency that
provides lower traceability than current electronic payments and
accounts and presents an alternative to the banking system. This could
be in the form of accounts with the central bank or tokens issued by the
central bank, which carry a very low risk of default and sit outside
the commercial banking system. A central bank digital currency could
also be designed to provide a low cost form of payment to put downward
pressure on uncompetitive prices in the payment system. Alternatively,
consumers might ask for deposit protection and greater regulation of the
banking system.38
People might also value the freedom and autonomy of cash for
illegitimate reasons. As noted in section 2, cash is used in the shadow
economy to facilitate illegal transactions or as a means to hide income
and reduce tax and other obligations. The International Monetary Fund
estimated New Zealand’s shadow economy at 11.7 percent of GDP in 1991
-2015. 39
It is difficult to assert what might occur in the shadow economy if we
had less cash. At the margin, some shadow economy activities could be
reduced as people consider the additional difficulty of engaging in them
without anonymous payments. For example, some people might be
dissuaded from buying illegal goods and services if they could not avoid
leaving electronic records of their purchases. However, it is also
possible that criminal activity would innovate to other mechanisms or
forms of payment discussed below.
There is debate on whether the anonymity of cash enables crime or
whether illegal transactions would continue without cash. Rogoff (2016)
and McAndrews (2017) agree that, without cash, criminals could use
commodity money (i.e. gold), foreign currency, and inflated invoices.
But they disagree on the extent to which these substitutes would be
used. Rogoff (2016) argues that there is no complete substitute for
cash, so criminal activity would be hindered if there were less cash in
society. McAndrews (2017) argues that inflated invoices would become the
most likely medium of exchange for criminals. He suggests that a
society without cash would likely move towards deeper institutional
corruption of businesses as criminals launder money obtained from
illegal transactions. He also warns that innocent businesses could find
themselves forced into money laundering as criminals look for businesses
to issue inflated invoices.
Issue 4 considers how some tax evasion might be reduced by less cash.
Loss of emergency back up
Cash can be a back-up payment mechanism when electronic payment
systems are not in operation or otherwise unavailable. The Reserve Bank
survey on cash use indicated that 37 percent of people held cash just in
case it was needed (i.e. not for immediate transactions). Cash is
particularly useful in case of ‘personal emergencies’, or localised or
short disruptions in electronic payments systems, and after large-scale
events conditional on the availability of retail stores able to accept
it. Figure 2 shows a spike in CIC as a percent of GDP in 1999 that could
be attributed to the ‘Y2K’ uncertainty.
Cash has several limitations in its usefulness as a back-up payment
in case of large-scale events or natural disasters. Because the supply
of cash and most retail operations are reliant on electricity and
communications, IOUs between small groups or people who are known to
each other might be more effective in periods of long electricity
outages such as those that occur in natural disasters. There might also
not be sufficient cash infrastructure capacity to meet a national
transition to cash in an emergency.
In addition, the National Risk Unit does not recommend including cash
in a civil defence kit or give guidance on the best means of payment in
a national disaster response period. This could be because people
already have their essentials in their civil defence kits, retail stores
might not be operating, and emergency responders will provide
additional supplies. In the weeks following the Christchurch February
2011 earthquake, public demand for cash did not increase substantially.
Commercial banks anticipated an increase in demand for cash and
increased their stores of cash and set up temporary ATMs based on
generators. However, the bulk of these cash stores returned to the
Reserve Bank relatively quickly. Figure 2 shows CIC did not peak as a
share of the population during 2011.
Issue 4: On balance, there would be limited effects on budgeting, financial stability and government revenue.
Transitioning to a society with less cash does not significantly or
negatively affect household budgeting, financial stability and
government revenue.
Budgeting
Cash is widely cited as a budgeting tool. Psychological studies show
that paying in cash incites a higher psychological pain of parting with
funds. This is because the tangible nature of cash results in high
transparency of payments and so generates a greater awareness of
spending.40
This greater ‘pain of paying’ encourages less spending and is useful
for managing discretionary spending, but it could reduce willingness to
pay bills or debt. Shah et al. (2016) suggest that consumers should
automate their essential payments and savings using online banking then
spend disposable (leftover) income using cash. Cash might also be useful
for limiting spending when people need to keep money separate for other
purposes.
People who prefer to use cash for budgeting might benefit from new
electronic budgeting tools such as budgeting applications on mobile
phones. For example, several banks in Dubai provide real time balance
updates or notifications every time money is spent, replicating the
relatively high ‘pain of paying’ that cash provides.
Cash is not the only nor the most important budgeting tool available
for people with low or no disposable incomes, high debts, overspending
habits, or poor mental health. For these groups, commonly cited
budgeting tools include awareness and education, direct credits,
multiple bank accounts, and removing overdrafts and credit. Cash is used
for people who are in full financial management in a Total Money
Management programme as they are allocated their weekly spending in
cash.41
However, the anonymity of cash makes it difficult for budgeting
advisors to identify areas of overspending. Cash also enables people to
default on automatic payments (for bills or debts) as they can withdraw
their full bank account balances into cash. Further, withdrawing money
into cash puts people at a higher risk of robberies than if they did not
withdraw their money. For example, people who withdraw their income
payments from ATMs at night to avoid automatic payments (processed in
the morning) face a risk of robbery, particularly if these habits are
well known in the community.
Financial stability
A society with less cash does not pose a risk to financial stability.
Cash represents a claim on the government and carries low default risk.
In theory, the ability of depositors to convert their savings into cash
represents a form of market discipline on banks that encourages them to
operate prudently. However, there is little empirical evidence to
support this. Engert et al. (2018) evaluate the bank runs during the
2007 – 2008 Global Financial Crisis and determine that cash withdrawals
are a small and unimportant source of market discipline on banks. Shin
(2009) finds that the Northern Rock bank run was triggered predominantly
by wholesale runs, and the in-branch runs to cash were insignificant.
Market discipline is only one form of discipline safeguarding our
financial system. Another form is regulatory discipline. The Reserve
Bank is mandated to use prudential regulation and supervision to
contribute to a stable financial system. The third form is
self-discipline, whereby financial market institutions self-regulate to
ensure their ongoing prudent operation.
The second aspect of stability is payment stability. Migrating from
two payment systems to one payment system would consolidate operational
risk in the single payment system. Greater emphasis would be required
on ensuring the operational reliability of the single payment system if
people could not easily revert to cash if there were a system outage.
Most electronic payments (except cryptocurrencies) rely on the same
back-end payment systems which, exhibit several single points of
failure.42
Increased tax revenue and reduced seignorage
Government revenue could be affected in two ways if cash use and
availability declined. First, removing the availability of notes and
coins might increase tax revenue as businesses would no longer use cash
to reduce their tax bills. The Inland Revenue Department has reported
that the most common ‘hidden economy’ activity is the underreporting of
taxable income, which includes income from cash jobs and transactions.43
Exactly how much tax revenue is lost due to this type of activity is
unknown. A tax working group paper suggests that unincorporated
self-employed individuals under-report approximately 20 percent of their
gross income. This estimate is based on a study commissioned by Inland
Revenue44
and could represent $850 million per annum in lost tax revenue from
unincorporated (non-trust or non-corporation) taxpayers. There is
considerable uncertainty as to the extent to which this number includes
self-employed people who are evading tax by underreporting cash revenue
versus other types of underreporting. It is also not certain that those
reducing their tax burdens by underreporting cash revenue would increase
their tax payments if cash were used less.45
Second, seignorage revenue might decline if the value of CIC declined
significantly. Seignorage revenue is the profit the Reserve Bank makes
from producing and selling cash and investing the profits, as well as
any profit the Reserve Bank makes from financial market trading. 46
The Reserve Bank estimates that it made around $148 million in
seignorage revenue last financial year by issuing cash and investing the
profits.
Other activity in the shadow economy is unlikely to be affected by
the disappearance of cash as people find other ways to circumvent the
law, as described in Appendix A. People who can no longer launder cash
will likely switch to other methods.
The New Zealand Reserve Bank has today published a summary of submissions on its consultation proposing a new mortgage bond standard aimed at supporting confidence and liquidity in New Zealand’s financial markets.
Submissions on the new
proposed mortgage bond standard are broadly supportive of the introduction of a
high grade residential mortgage backed securities framework for New Zealand –
known as Residential Mortgage Obligations (RMO).
The new standard aims to reduce
contingency risks for the Reserve Bank as a lender of last resort, ensuring
financial intermediaries supply sufficient high quality and liquid assets. The
standard also aims to provide issuers and investors with an additional funding
and investment instrument, supporting the development of deeper markets.
Assistant Governor and
General Manager of Economics, Financial Markets and Banking Christian Hawkesby
said he was pleased with the range and depth of feedback received during the
consultation process.
“The consultation process
has been successful in delivering improvements to the initial concept for a new
mortgage bond standard to support financial intermediation, liquidity
management and funding in New Zealand’s markets.”
The feedback from issuers, investors
and other market participants has been constructive and it will help inform the
Reserve Bank’s final policy decision which is expected to be published by the
end of 2019.
The Reserve Bank has decided
to update repo-eligibility conditions for RMBS in
the transition to the final RMO policy. This includes a new approval process
and requirement for a more detailed RMBS reporting template.
The New Zealand Reserve Banks says the Official Cash Rate (OCR) is reduced to 1.0 percent. The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.
Employment is around its
maximum sustainable level, while inflation remains within our target range but
below the 2 percent mid-point. Recent data recording improved employment and
wage growth is welcome.
GDP growth has slowed over
the past year and growth headwinds are rising. In the absence of additional
monetary stimulus, employment and inflation would likely ease relative to our
targets.
Global economic activity
continues to weaken, easing demand for New Zealand’s goods and services.
Heightened uncertainty and declining international trade have contributed to
lower trading-partner growth. Central banks are easing monetary policy to
support their economies. Global long-term interest rates have declined to
historically low levels, consistent with low expected inflation and growth
rates into the future.
In New Zealand, low interest
rates and increased government spending will support a pick-up in demand over
the coming year. Business investment is expected to rise given low interest
rates and some ongoing capacity constraints. Increased construction activity
also contributes to the pick-up in demand.
Our actions today
demonstrate our ongoing commitment to ensure inflation increases to the
mid-point of the target range, and employment remains around its maximum
sustainable level.
