The last financial cycle and the case for macro-prudential intervention
This article takes a look back at the last financial cycle that occurred over the previous decade – a cycle that contributed to one of the longest periods of uninterrupted economic growth in New Zealand for the past 60 years. It conducts a counterfactual exercise that maps the Reserve Bank’s new macro-prudential policy framework on to financial system developments over the period. It finds that, with the benefit of hindsight, there would have been a compelling case for macro-prudential intervention from 2005 onwards to address a build-up of systemic risk within the financial sector. The temporary increase in capital or liquidity buffers, or the application of loan-to-value restrictions on residential mortgages, would have materially enhanced the resilience of the financial system in the face of developments late in the decade. Macro-prudential intervention may have also tempered credit and asset price developments during the boom itself.