A key lesson after the global financial crisis was the importance of improving the resilience of the financial system.
We needed to make the banks safer.
The New Zealand banks did not get through the GFC of their own accord. The Government provided a $133 billion guarantee, the Reserve Bank provided a $10 billion wholesale guarantee and bought $8 billion of debt off banks to provide them with liquidity to survive.
Numerous changes happened after the GFC.
The RBNZ introduced new prudential liquidity policy rules.
The banks had to meet a new core funding ratio requirement. It meant holding more deposits and more of one year or greater to maturity. It meant banks had more stable funding and were less reliant on offshore markets.
Loan-to-value restrictions and easings were used to counter extremes in housing.
The RBNZ also wanted banks to hold more capital to make them better able to absorb an extraordinary economic hit.
That drew flack.
Banks had already improved capital positions after the GFC but the RBNZ wanted more. It was the subject of considerable scaremongering in 2019.
The RBNZ dug in and made the final decision at the end of the year – banks would need to hold even more capital.
Little did the RBNZ know a major economic event was just around the corner.
The improved position of the banking system has allowed the RBNZ to loosen some regulatory mechanisms so the banks can support the economy. Loan-to-value restrictions have been removed. The core funding ratio has been relaxed. Deposit lending rates have dropped, allowing borrowing rates to do the same. The timeline for hitting new capital requirements has been pushed back.
The RBNZ is urging banks to be courageous and lean on their own balance sheets. That is code for be prepared to make a loss, not exactly music to a bank manager’s ear but the spirit is simple: use your balance sheet to support the economy and think long term.
That brings me to what are we going to learn from this downturn. The readiness of the health system is front of mind. Unfortunately, more pandemics could become a feature.
The vulnerability of small businesses has been another feature. Of course, who could have envisaged a national lockdown? Some argue we have just been caught in an extraordinary one-off rip.
That overlooks three facts.
The first is that some businesses have been better prepared with more wriggle room on their balance sheets. The second is that covid-19 might be a one-off but think of the Christchurch earthquake, drought, challenges of online shopping for retail, Mycroplasma bovis … disruption is here on many levels. Third, we know there is massive divergence in performance for businesses and farms operating in similar environments and conditions.
Small businesse including farms are the backbone of the economy. Their performance matters for the owners and economy.
On my wish-list post covid-19 is that a concerted effort appears to improve the financial skills base of small-to-medium enterprises. That will help unlock business performance upside but also make businesses more capable of handling risks and downside challenges.
We can start by making financial literacy or the more kid-friendly term money mojo compulsory in schools. Financial skills are a life skill and should be part of the teaching programme.
The kids of today are the business owners and farmer of tomorrow. It’s time to start giving them more money mojo today.
