Groser Tim: Motions — Reserve Bank Funding Agreement—Ratification 
Groser Tim: Motions — Reserve Bank Funding Agreement—Ratification 
[Volume:647;Page:16657] 
TIM GROSER (National) 
: 
 I will take just a brief call. Obviously as my colleague has just explained the Opposition will not be opposing this motion. It is crucial to this country that the prudential controls over our banking system both narrowly defined—in this case we are moving in a broader direction—and more generally defined are in good shape and that our officials in the Reserve Bank have the resources to do it. 
We have raised some legitimate questions. We will have to I presume take it on trust unless we get another intervention from the Government benches to indicate why such a significant increase in funding has been justified. I do not know whether an independent Treasury report has been commissioned on this but I think the position the Opposition finds itself in is that we will just have to assume that this is a responsible bid for what is unquestionably an activity that the Opposition supports. We certainly know that the prudential soundness of our financial system lies at the very heart of the stability of—well every country in the world. 
The authorities here are trying to play what is essentially an eternal cat and mouse game that occurs with financial markets. As you no doubt know Mr Deputy Speaker the technical term for this is the process of financial disintermediation whereby we establish a set of regulatory frameworks to manage risk and to manage the interventions of certain financial institutions. By definition we create an incentive on the part of other institutions not covered by the regulations to game the system thus giving rise to this concept of disintermediation between the bank and the non-bank sector. 
In a sense it is a game that will be played for eternity. No matter what the authorities do in the future they will by definition always create this incentive and again another cycle will have to catch up which is essentially what this funding is related to. It is related to extending the prudential controls for the reasons that the Minister of Finance has very adequately described towards certain non-bank deposit takers. 
Mr Deputy Speaker you may remember a certain period of New Zealand’s economic history during which the controls over the banks were so tight that the principal source of non - State Advances Corporation funding was in solicitors’ funding for mortgages. So stringent were the capital adequacy reserve ratios and other mechanisms that essentially the State drove the entire lending sector out into the non-bank sector. This continues in this pattern. We support the regulatory extension of the prudential controls. 
In conclusion I will make a few fairly obvious points about why this measure is so important. The concept of a sound financial system is as central to the stability of a society as the rule of law is. Frankly I put far more expectation on hyperinflation driving Mr Mugabe out of power than on any conceivable trade or political sanctions the international community might be considering in the future. The history of the world is littered with despots and Governments that believed they could ignore the implications of sound money sound financing and a sound financial sector. 
I recall always that there is a tension here between over-regulation and under-regulation. There is huge literature as you no doubt know Mr Deputy Speaker about the question of moral hazard for bankers and I always thought that the best definition I ever heard was the definition given to one person who inquired too tightly as to where the limits of Bank for International Settlements intervention to support failed central banks would stop and start. He said: “I will not tell you sir how far we will go to bail you out. This is something I will discuss with your successor.” 
So there is always necessarily a certain a degree of what I would call constructive ambiguity around these matters in which regulatory authorities—be they as in this case the Reserve Bank of New Zealand or in the case internationally the Bank for International Settlements—necessarily have to keep up their sleeve just how far they will go to avoid what is called moral hazard or in other words bailing out people no matter what loss they have made. So it is crucial to that and it is crucial to low inflation growth. 
We know from the literature that in respect of developed countries inflation up to and about 3 percent is the usual measure of it not just in New Zealand will be good for and is associated with higher real growth. Inflation above 3 percent is associated with lower growth. So much for those people who advocate weakening the inflation targets further in the naive belief that it would lead to sustainably higher employment and growth outputs. For reasons I will not bother with the metrics are a little bit different in respect of developing countries where we can see the conjunction of somewhat higher rates of single digit inflation with higher real growth rates. But basically for developed countries the sort of framework we have developed in New Zealand we have broad support for in this House as it appears to be correlated with much sounder outcomes for the country as a whole. So we have some questions over the quantum. I am sure they will go unanswered tonight but nevertheless the Opposition supports the underlying objectives of this motion. 
Motion agreed to.