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(2) what are the govt options with a budget surplus?

• Options: Govt can retire debt or cut taxes or build up assets or
increase govt. spending.

• Impact of govt debt retirement on the economy & the financial
system depends partly on who holds the debt securities


(2)• Retirement of Govt Debt held by domestic market

interest rates may fall when govt security holders save the
money they receive & govt need for funds drop.
Also govt risk drops.


(2) • Retirement of Govt Debt held by overseas institutions

more independent policy setting regime.
Initially, no demand ↓ for domestic loanable funds  no
impact on interest rates.
- But retirement of debt makes govt safer (credit rating) &
reduces need to service debt with interest so interest rates
should fall 


What are some issues relating to govt debt?

• Amount of debt usually compared with GDP- actual percentage an indication of easily it can be paid back

• Preserving an efficient capital market
- Argument for
preserving the liquidity of key benchmark maturities

• The reason for borrowing the money.
- If it is borrowed for
productive purposes e.g. to invest in infrastructure, then ability to
repay may not be an issue.


what relationship do GDP and employment have?

if GDP increases then employment increases and vice versa


importance of fiscal policy?

• For countries continually running a budget deficit, risk profile of country higher, so too is interest rates, & money has to be
borrowed from mainly off-shore to fund it.


(3) functions of RBNZ?

• Monetary policy formulation(control of MS) & credit supply
• Domestic market operations
• Prudential supervision
• Depository & settlement services
• Currency
• Foreign reserves management
• Crisis management.


(3) Domestic market operations

- operating as settlement bank
for financial system. ESAS system processes settlement
- over $25.9 billion worth of daily transactions in 2014


(3) • Crisis management.

– Acting as lender of last resort for the financial system BUT
no guarantee of banks’ deposits & no deposit insurance
under usual conditions


(3) Depository & settlement

- oversight of payments system


(3) prudential supervision

supervisory role to all non-bank bank deposit
takers (NBDTs) such as insurance companies, deposit-taking
finance companies, non-deposit taking finance companies


Basel I Guidelines on capital adequacy

• Capital adequacy focused on level of credit risk with defined
capital & statement of minimum capital ratio, risk weighting of
balance sheet assets & conversion of OBS items to ‘balance
sheet equivalents’ & risk-weightings


Basel II Capital Accord Framework- 1. Definition of bank capital

(1)Tier 1 - the core capital or highest quality (lowest risk)
Characteristics: permanent commitment of funds i.e. readily
available & rank behind claims of depositors if winding up bank

e.g. • paid-up ordinary shares
• retained earnings
• current year’s earnings
• non-cumulative, irredeemable preference shares


2. Basel II Capital Accord is made up of three pillars:

Pillar One- capital adequacy

•Pillar Two- supervisory review

•Pillar Three- market discipline & disclosure


Pillar 1: operational risk

- internal and external fraud
- employment practices and workplace safety
- clients, products and business practices
- damage to physical assets
- business disruption and system failures
- execution, delivery and process management


Pillar 2: Supervisory Review

•Supervisors to ensure banks have sufficient capital & to
encourage development of, and improvement of existing risk
management policies- four guiding principles


Pillar 3: Market Discipline

• Designed to reinforce market discipline in banks’ capital

• Note NZ has been leader in this aspect- requiring banks to
disclose quarterly relevant & quantitative info relating to their
risks, & capital adequacy


two possible ways banks can increase capital ratio?

1. Find more capital
- could involve rights issue, reducing dividends, raising
money through other forms e.g. non-cumulative perpetual
preference shares

2. Reduce assets
- selling off subsidiaries, securitisation of loans.