Parker David: Insurance (Prudential Supervision) Bill — In Committee Third Reading 
Parker David: Insurance (Prudential Supervision) Bill — In Committee Third Reading 
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Hon DAVID PARKER (Labour) 
: 
 As earlier speakers on behalf of the Labour Party have said we support the Insurance (Prudential Supervision) Bill as far as it goes. It does improve the prudential supervision of insurance companies. It will help protect New Zealand consumers by ensuring that those insurance companies act prudently maintain prudent balance sheets and do not fail. That is important because insurance companies are repositories of not just contracts of insurance which people expect them to honour—for example if people have life insurance they expect the insurance company to honour the contract when they die—but also money through endowment policies and the like. So we need to ensure that they are robust. That is good as far as it goes. 
I think the bill has been brought forward because of the effects of the global financial crisis and the failures we have seen around the world of some very large insurance companies which have cost many billions of dollars not just to consumers through insurers not being able to honour their contracts of insurance— 
Craig Foss 
: I don’t think any insurance companies failed. 
Hon DAVID PARKER 
: —but also to taxpayers who have had to bail out those insurance companies. Well there have actually been some multibillion-dollar Government investments in respect of some of the insurance companies in the United States. 
In terms of how this bill works it increases the powers of supervision of the Reserve Bank of New Zealand which is the body that has been given increased supervisory powers to maintain prudential supervision of insurance companies. The point has probably been made by prior speakers that there is a lost opportunity here to go further in respect of prudential supervision of our banking sector which could assist our export sector through influence on monetary policy. At the moment the Reserve Bank has an almost singular focus when it comes to monetary policy on interest rates. It tries to take the excesses out of the economy by putting interest rates up and therefore suppressing consumption in order to ameliorate the effect of asset bubbles and to take the heat out of the economy which is inflationary. The bank’s reliance on that single instrument has had a detrimental effect on the export economy. The export economy of New Zealand has suffered a number of detriments. For a start the way in which we have implemented monetary policy in New Zealand means that we have structurally higher interest rates than our competitors. So whether one is a farmer or an exporter in the manufactured goods area one is facing higher interest rates than those faced by competitors overseas. 
That has a number of detriments. The first is that the exporter or the investor in a New Zealand enterprise has a higher cost structure than competitors overseas in respect of interest rates. So if all other things are equal a widget manufacturer in New Zealand has a higher cost structure than overseas competitors because New Zealand has structurally higher interest rates. After 20 years of monetary policy in its current incarnation we do have to question in my view whether the higher interest rates that we have structurally in the economy now are actually partly an outcome of current monetary and Reserve Bank policy. This legislation which changes the prudential requirements for insurance companies could have taken a similar approach in respect of banks so as to introduce more tools to the Reserve Bank so that it does not have to rely exclusively on the interest rate tool. 
The second detriment that is suffered by New Zealand businesses as a consequence of those higher interest rates—which also undermine their ability to invest in productive plant which is needed to improve the overall productivity of the New Zealand economy—is that we are effectively creating an unlevel playing field in a world where there are global flows of capital. A bidder who is sourcing funds overseas to bid for a profitable New Zealand business pays a lower interest rate in his or her home country than a New Zealand borrower pays when borrowing in New Zealand—unless it is a multinational like Fonterra which borrows from the international market. In the case of a small to medium sized business facing competition from an overseas purchaser for the purchase of the same assets—again if everything else is equal; if it is facing the same wage costs the same sale price for its goods the same cost for its raw materials—the overseas buyer can afford to pay more for those productive New Zealand assets compared with the New Zealand purchaser of those assets because the overseas purchaser has a lower cost of funds. So all other things being equal overseas purchasers can afford to pay a higher capital sum for that same business enterprise and I do not think that is in the long-term interests of New Zealand. So we need to have a different mechanism for the Reserve Bank in order to take the pressure off the interest rate device. 
We also know that the sole reliance on the interest rate device is according to the exporters causing volatility in our exchange rate which is difficult for them. The volatility of the New Zealand exchange rate is extreme. The New Zealand currency is the fourth most traded currency in the world. It is an astounding statistic. Our currency is traded more than the Indian rupee a vastly bigger currency than New Zealand’s. It is traded more than the Brazilian real. It is traded more than the South African rand. These economies are vastly bigger than New Zealand’s economy yet there is more trade in the New Zealand dollar than there is in any of those currencies. I think it is even traded more than the Russian rouble. 
Hone Harawira 
: Why is that? 
Hon DAVID PARKER 
: Perhaps it is because we have structurally higher interest rates and people are speculating on their knowledge that the Reserve Bank pulls that trigger harder than most other countries in the world have done historically. So the exporters say they need some more tools in the tool kit other than the interest rate and they say we need to be using prudential tools in respect of banks more than we do. That is why is this matter is relevant to this discussion. Here we have the Reserve Bank being given more tools in respect of prudential supervision of the insurance sector yet in the banking sector we have very limited ways in which those prudential tools can be used by the Reserve Bank. 
The Reserve Bank has two main functions. The first is the maintenance of stable prices and the second is the maintenance of stability in the financial sector. There is not much doubt that although relative to the rest of the world we did pretty well during the global financial crisis we were not perfect. We had to have Government guarantees of banks in terms of both retail deposits and wholesale deposits and we had to have the Reserve Bank buying packets of securities from financial institutions. So although we might have done better relative to some other countries—partly because of the savings history of Australia and the strength of its banks not because of our own New Zealand - based savings I would note—it is true that we are not perfect. I think it is worth considering increasing the powers of the Reserve Bank in respect of not just insurance companies but also banks so that the banks can use prudential ratios to stop the rapid growth of credit in boom times. 
In New Zealand we ratchet up the interest rate. The interest rate that New Zealand borrowers including exporters have to pay goes up and their cost structure goes up. Actually most of that money ends up going overseas because it is owed to overseas lenders. It does not stay in the New Zealand economy. The Labour Party believes we should be conferring on the Reserve Bank and making explicit that instead of relying purely on interest rates it can actually adjust prudential ratios for the banks so that they have to source more of their money offshore. Sometimes they will have difficulty doing that and we will stop some of these flows of “hot” money in and out of the country which is what really caused the over-inflation of the property market. The over-inflation of the New Zealand property market was not based on New Zealanders’ saving more money and therefore having more money in the bank to spend on assets; it was actually because the liquidity in the New Zealand economy increased because of the banks borrowing a lot of money offshore and lending it in New Zealand. That was good for the banks—they earned an extra margin—but it was not good for the New Zealand economy because it inflated the property bubble and added to the imbalance in the New Zealand economy. 
This bill is good as far as it goes but the Government is missing an opportunity to make it explicit that the Reserve Bank can use prudential ratios for monetary policy purposes. It can do that only tangentially at the moment; it can use prudential policy first and foremost only for the prudential supervision of the banks. We say that the Reserve Bank needs to be doing more than that and use prudential ratios to control the growth of credit. Thank you.