Question

Impact and policy response to the Global Financial Crisis (GFC)
a) What impact did the GFC have on the New Zealand financial system and economy?

b) Following the GFC, what policy changes were made to make the NZ financial system more resilient to financial shocks? (not the immediate emergency responses)

Answer 1

a)

The Global Financial Crisis had major effects on the NZ financial system and economy. It prompted responses across the full range of Reserve Bank policies, including monetary policy, liquidity management and prudential policies.

* As the global crisis emerged and deepened, we responded by reducing the OCR aggressively. The OCR was cut during 2008 and early 2009 from a high of 8.25 percent to just 2.5 percent. These reductions were appropriate, despite high headline rates of inflation at the time due to record high oil prices. The policy easing was consistent with an outlook for rapidly diminishing inflation pressures as the global and domestic economies turned sharply downwards.

* Becuase of the crisis banks face a higher cost of funds. It is now more expensive for them to borrow offshore, which in turn has seen them compete more aggressively for funds raised in the domestic retail deposit market.

* Households and businesses are considerably less willing to take on new debt. Credit growth remains very subdued.

* New Zealand is now facing an upward sloping yield curve – longer term interest rates are higher than short-term rates.

b)

The financial system has grown in size, complexity and interconnectedness. It continues to change with institutional, technological and financial innovations generating new products, services, rewards – and risks.

financial stability matters – and not just to the depositors, creditors and counter-parties of an affected institution. It matters to the economy and society as a whole.so government focused on that.

Other parts of the ecosystem include insurers, payment and settlement systems, capital markets and non-bank lending institutions. Although these sectors are small in comparison to the banking sector, they play an important role in the financial system: ensuring that companies can operate with confidence and manage their risks, facilitating smooth and efficient payments within the economy, and providing capital to particular market segments.9