Bank examines lending controls

Press, Volume CXII, Issue 33051, 19 October 1972, Page 23

Bank examines lending controls

A proposal that a minimum reserve assets requirement should be introduced in place of lending limits is being examined by the Reserve Bank, the bank’s annual report says.

Under the proposal, the; minimum requirement would: be variable. The need for a procedure! to restrain bank credit has; been replaced by a too slow; growth in bank lending, according to the report. Controlling trading bank operations by imposing ceilings on advances was ineffectual as a long-term measure, because the banks; have little incentive under] such a system to compete for deposits, and other intermedi-| aries gain deposits and make available to the private sector the credit which the; banks have been denied the ability to make, the report says.

■ Arbitrarily imposed ceilI ings on trading bank advances diminished one of the i most important advantages ' that a banking system had to ' I offer to the community. This ’! was the ability of the bank- ■; ing system to meet the changing credit needs of the comimunity. The report does not sug- ■ gest that banks should be 'Sable to create credit without >i limit but rather that they ’ should be able to meet the ’ i temporary credit needs of the ■ I economy, without credit to ! jother sectors being restrained •Ito an undesirable degree. ; j The report says that the ' broad objectives of monetary - policy should be to influence the availability and cost of

jail money and to ensure that an efficient financial system; (was available to the com-' munity. ' “The trading banks are noti 'separate from the rest of the; financial system and the method of influencing their ;operation must recognise the • need for competition between the banks and other j. elements of the financial system if the objectives of j! monetary policy are to be f-achieved.” the report says.