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NZ Financial System

NZ Financial System. And the role of the Reserve Bank of NZ. NZ Financial System. The Reserve Bank of NZ…. 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.

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NZ Financial System

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  1. NZ Financial System And the role of the Reserve Bank of NZ

  2. NZ Financial System

  3. The Reserve Bank of NZ… • 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 15th September 1pm!

  4. Registered Banks in NZ • 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

  5. Other Financial Institutions…. • 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

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

  7. Reserve Ratio/Fractional Banking • 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

  8. Settlement Cash Deposits • 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.

  9. The OCR and Settlement Cash Deposit Accounts… • 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%

  10. Simplified Model of Bank Lending

  11. Assumptions of the Model • 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

  12. Primary v Secondary Expansion/contraction of the Money Supply • 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

  13. The Credit Mulitiplier…. • 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

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