And the role of the Reserve Bank of NZ

Other Financial Institutions Such as finance companies, building societies, credit unions, co-op saving societies Examples include: NBS, Southern Cross, P.S.I.S, All Registered Banks in NZ These include Westpac, Kiwibank, Rabobank, ANZ/National, TSB etc The Public banks with mainly the registered banks and …… The Government Banks with… The Reserve Bank of NZ (RBNZ)Who acts as a bank for….

 Acts as NZ’s central bank.  Has a number of functions which include: ◦ Banking for the NZ Gov’t ◦ Registering and Supervising all Banks in NZ and other Financial Institutions. ◦ Operating Monetary Policy to achieve price stability ◦ Issue currency ◦ Manage NZ Foreign Exchange (FX) reserves ◦ Providing Banking Services for other banks  Want to know more…you will when we go there Tuesday 15 th September 1pm!

 Can only be called a bank if registered with the RBNZ. ◦ To do this must provide  Transactional Accounts for Public/Business  Loans  Transfer of Funds  Safe Custody/Storage of Valuables  Foreign Exchange ◦ Also must meet strict requirements such as:  Min Capital Outlay $15m  Prudent Capital adequacy Ratio’s  Have proven experience/Good reputation/ Transparency

 Currently there are only 18 registered banks in NZ.  So all other financial institutions may act like banks but can’t be called banks.  What they offer: ◦ Loans – usually at higher interest rate (more risk) ◦ Investment options – Shares, Property – Managed Funds etc. Again higher rates of return promised but usually at higher risk. ◦ Other savings/banking services

 Do banks really create money? ◦ Lets find out….out  Key concepts ◦ Reserve Ratio ◦ Settlement Cash Deposits ◦ Simplified Model of Bank lending ◦ Primary v Secondary Expansion/Contraction of Money Supply ◦ The Credit Multiplier

 In simple terms. Banks lend out more than they have in deposits. ◦ Eg Kelly deposits $2000 into the McIntosh Bank and Ms McIntosh lends out $1900 to Michael  How much is Ms Mc keeping in reserve?  Is this prudent?  A Reserve Ratio is how much banks keep of the original deposit in case the depositor’s claim there deposits back. ◦ E.g. Kelly turns up an hour later and demand’s here $2000 back

 Do we all bank with the same bank? ◦ What happens when Alex decides to pay back Claartje the $165 he owes her, assuming Alex banks with TSB and Claartje banks with Rabobank?  Each bank holds what are called Settlement Cash Deposits with the RBNZ – other countries equivalent  At the end of each day all banks Settlement Cash Deposits are debited or credited with the applicable amount.

 What happens if TSB doesn’t have enough money in its account with the RBNZ to pay Rabobank? ◦ They can borrow off the RBNZ at the OCR +.25% ◦ If they are in credit the RBNZ will pay them interest at the OCR -.25%

Combined balance sheet of all registered banks Assets $mLiabilities $m Reserves 200 Loans to Public (Advances) 800 Transactional Account 1000 Balances 1000 Balance sheet for the RBNZ Assets $mLiabilities $m Loans to Govt 200 Other 300 Transactional account 200 Deposits of Registered Banks Deposits of Govt

 All registered banks are combined into 1 group and that all reserves are held as settlement cash deposits at the RBNZ  All consumers use their transactional accounts at the registered banks for all transactions (i.e. no use of notes and coins)  The Government banks with the RBNZ  Hypothetical Numbers

 Primary. ◦ The first initial injection/withdrawal from the financial system. Registered banks gain/lose new reserves.  E.g. Changes in Gov’t spending, Switching in and out of cash – i.e the public withdrawing more than they deposit and vice versa  Secondary ◦ After the initial injections banks will hold more reserves than their ratio. So they lend it out extra deposits until their reserves are equal to the reserve ratio. CREDIT CREATION

 To see what the final increase in the money supply is use the following formula ◦  M = 1/R x  N  M = Money Supply  N = Increase in new money (Reserves)  R = prudential reserve ratio ◦ Ex:  N = $1000 & R = 20% ◦  M = 1000/.02 = $5000 Limitations…the public don’t always deposit back loans cash..Tax payments, import payments, deposits to other banks…..bank may not lend out to the full reserve ratio tighten credit conditions etc