Concluding remarks

To solve the problem of perverse incentives present in the New Zealand economy, one has to grapple with many other issues. The policy solution of capital liquidity requirements is by no means a total solution to the overarching problem of incentive misalignment. The RBNZ’s implementation of these standards in a mandatory fashion must be conducted with a combined policy approach. Utilising the voluntary compliance of the financial institutions themselves first, to ease the standards into place, would ensure that these stakeholders are not completely alienated. Furthermore, a marketing campaign to praise the prudent institutions in a public manner would encourage other institutions to voluntarily pursue stability, because stability is now profitable. These efforts combined with an increased education campaign to teach the public what kind of loans they can actually afford will ensure not only that stability is profitable, but also consumers punish imprudence. The answer to the question at hand, therefore, is yes, the RBNZ should implement more stringent capital liquidity standards, these standards, however, should be implemented with accompanying solutions.