Deregulation ‘safe’ if Govt changes

Press, 4 February 1987, Page 40

Deregulation ‘safe’ if Govt changes

PA Wellington If the Government changes in this year’s election, there would be no substantial changes to the financial deregulation already adopted, the Associate Minister of Finance, Mr David Caygill, has claimed.

At a function to launch the N.Z. Institute of Economic Research’s latest study into the effects of financial deregulation, Mr Caygill detailed some of the reasons for the speed with which the financial sector had been deregulated. The main reasons, he said, were the internationalisation of capital markets — and the fact that the financial industry wanted it. He said New Zealand could not stand alone, and he counted as one of the rewards of deregulation the increased skills manufacturers and fanners have shown in managing foreign exchange transactions.

He added, however, that he still came across one or two manufacturers who not only did not manage their foreign exchange risks, but were not aware they had any. Mr Caygill maintained that, had there not been a change of Government in 1984, the deregulation would not have gone as

far or as fast. He cited higher employment levels in the industry as evidence that the deregulation had worked. “Employment in the finance sector is up. On the other hand real interest rates are squeezed by comparison, though nominal rates are still high. “A sector employing more people but charging less in real terms can’t be a bad combination,” he said. Institute economist, Mr David Harper, concludes in his review of financial deregulation that the most surprising feature has been the sheer speed with which firms have responded, and the relatively few adjustment problems encountered so far.

The reforms have allowed financial companies to minimise costs, and also improve their internal management, he says.

He is critical of the lack of neutrality in the reforms, pointing to the inability of some institutions, such as savings banks and building societies, to expand into new business areas because of legislative restrictions.

“With hindsight, more consideration should have been given to these adjustment problems,” Mr

Harper says. He speculates that many of the changes seen in the industry would be occurring even without the financial reforms — but not at the same pace.

He also asks whether the process of adjustment would have been so smooth if the financial services market had not been so buoyant at the same time.

Mr Harper expects more very large financial firms to arise from mergers and acquisitions as companies try to achieve economies.

Banking deregulation can be expected to affect the wholesale market more than the retail market, and the failure rate of financial firms can be expected to increase, he says, though bankruptcy statistics do not reflect this yet. The failure of any individual financial firm was not expected to lead to a general loss of confidence in the financial system, because firms that fail would be quite small and may be absorbed by a larger parent, he says.