Ensuring financial services work better for New Zealand
In a speech to the Canterbury Employers' Chamber of Commerce in Christchurch, Dr Bollard said that capital markets could develop more if lenders and borrowers changed their behaviour.
He said that limited product and service innovation is probably due to the fact that government and larger businesses have been net savers in recent years, while the household sector has been a heavy net borrower.
"Banks deliver basic banking services in New Zealand reasonably efficiently. However our capital markets do not all look so sophisticated – there are some financial services that our businesses and our investors cannot easily access on-shore.
"Our financial system currently looks sound. The industry has adapted to our rather unique circumstances. Because of this, and in particular our lack of household savings, we probably remain more vulnerable to financial shocks than most developed countries."
New Zealand's economic performance could potentially be raised if its capital markets were wider and deeper, the performance of the non-bank financial sector was enhanced, and the total pool of financial savings and financial literacy were raised.
"The New Zealand market is too dominated by bank debt and derivative markets, and its domestic capital market is too small," he said.
Dr Bollard said the more means by which savings can be channeled into capital investment by firms, then the more back-up there is if any single channel fails.
"Countries with efficient financial systems tend to be less prone to financial crises, and tend to recover more quickly at less cost if such a crisis does occur."
He said firms rely too heavily on debt financing. This could constrain their flexibility, their development and innovation. In many other economies firms rely on some combination of external equity and debt for their financing.
"New Zealand's capital markets are relatively small. Very few New Zealand dollar corporate bonds or securities are issued by local businesses, and New Zealand's stock market is small relative to the size of its economy.
"Whether as a symptom or consequence of this, the direct and indirect holdings of equity by New Zealand households appear to be relatively low by global standards."
Dr Bollard said there is room for New Zealand's capital markets to develop.
"These improvements can come about through more effective regulatory arrangements currently being considered, through a better understanding of some of the outcomes of the current tax environment, through the promotion of deeper and more liquid bond markets, and through improved financial literacy," Dr Bollard said.
Improvements would also come from financial innovation and the necessary recovery of private savings.
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