Christian Hawkesby: Central banking and financial inclusion
Remarks by Mr Christian Hawkesby, Deputy Governor and General Manager of
Financial Stability of the Reserve Bank of New Zealand, to the Institute of Directors,
Canterbury, 21 April 2023.
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There is no shortage of challenges as a central banker in the current environment, with
domestic and global inflation too high and persistent, and the recent fragilities exposed
by bank failures in the United States and Europe.
Today I'll touch briefly on these topics, with a particular focus on financial inclusion and
the impacts on different parts of our society.
In doing so, I'll highlight some material from our upcoming Financial Stability Report (to
be published on 3 May) and reiterate some of the messages from our most recent
Monetary Policy Review (5 April).
Periods of high consumer price inflation hit hardest for those with low or fixed incomes
such as a government benefit or pension, and those without significant wealth or
savings to draw on.
At the same time, lifting interest rates to cool the economy, and ultimately combat high
inflation, also has consequences for those on the margins of the workforce with the
least job security. This is why it is so important to foster an ongoing environment of low
and stable inflation.
Over the course of the past 18 months, the Monetary Policy Committee (MPC) has
increased the Official Cash Rate (OCR) from 0.25% to 5.25%.
At the most recent Monetary Policy Review, the Committee noted that:
the full impact of the monetary policy tightening is yet to be fully realised,
there are early signs that growth in the domestic economy is beginning to slow,
and
the extent of this moderation will determine the direction of future monetary policy.
The recent high profile failures of Silicon Valley Bank (SVB) and Credit Suisse have
proven pertinent reminders of the importance of financial stability. Particularly, the
importance of sound financial risk management by banks in an environment with large
changes in interest rates.
In New Zealand, all registered banks are required to have systems in place to monitor
and control their material risks, including interest rate risks. Our banks also operate
different business models that mean that they are not as exposed to the risks that have
led to the issues with SVB. Our banks undertake a regular and rigorous stress testing
programme, and our Bank Financial Strength Dashboard displays data on the financial
health of registered banks in New Zealand.
Our work to promote a sound and stable financial system is not just to avoid and
mitigate periods of instability, but to enable an environment that promotes the prosperity
and well-being of New Zealanders and contribute to a sustainable and productive
economy. We do this by seeking a strong, efficient, innovative and inclusive financial
system, consistent with our Financial Policy Remit.
Central banks around the world continue to contribute towards improving financial
inclusion, defined as individuals and businesses having access to useful and affordable
financial services delivered in a responsible and sustainable way. Globally, initiatives
from central banks include delivering inclusive payment systems, factoring inclusion into
regulatory settings, collaborating with public and private networks, delivering financial
literacy programmes and undertaking research to fill evidence gaps.
Financial stability is the highest contribution Te Ptea Matua can make to financial
inclusion. A well-functioning financial system with low probability of insurers and
deposittakers getting into trouble increases the likelihood that people can access, and have
trust in, the products and services they rely on.
Financial inclusion can also contribute to stability. Providing financial services to a
larger customer base can promote a higher share of customer deposit funding,
contributing to stability. Inclusion efforts, such as increased lending to smaller firms, can
also help to diversify asset portfolios and reduce the relative size of any single
borrower. A review of 2,600 banks in 86 countries found a higher level of inclusion
contributes to greater bank stability, particularly in countries with strong institutions and
sound regulatory settings. We explore this further in an excerpt from our May 2023
Financial Stability Report that we are pre-releasing today.
Our Kimihia te mea ngaro - Mori access to capital programme was launched to better
understand Mori access to capital in the New Zealand economy and bring a more
deliberate approach to financial inclusion. An efficient, effective, and stable financial
system is one where capital is allocated on the basis of risk and return, one in which
there is equitable access to capital for all firms, including Mori firms. Since we released
our issues paper on Mori Access to Capital in August 2022 , we have been working with
retail banks to find solutions, including working collaboratively on how banks assess
lending against whenua Mori, which has the potential to improve access to capital for
Mori landowners and collectives.
Similarly, our Future of money - Te moni anamata programme has been working to
ensure that the money we issue as a central bank continues to enjoy trust and
confidence and promotes financial and social inclusion. The devastating impact of
Cyclone Gabrielle highlighted the lack of resilience in the cash system and its
vulnerability to outages of power, data and roading networks. Given the increased
likelihood of extreme weather events in the future as a result of climate change, this
resilience needs to be enhanced.
We will continue to explore synergies between inclusion and stability as we develop our
approach to financial inclusion. We are doing so in concert with our Council of Financial
Regulators partners, for which 'Financial Inclusion' is one of 5 priority themes.