I. Problem definition
Stringent capital liquidity standards are posed to counter systemic perverse incentives in the current structure of New Zealand’s finance sector. In the wake of the 2007 financial recession, it has become increasingly clear that the pursuit of short term profit can often be at the cost of long term stability (Davies and Green, 2010: 27). The presence of this destructive incentive to create a ‘financial bubble’ is indicative of a number of structural problems with the financial sector, and is, therefore, a multifaceted problem. The first consideration is regulation. Leverage rates in excess of seventy percent only exist in the period of deregulation starting in the mid 1990s with the overruling of legislation that ensured that a more humble ratio of collateral was maintained (Balin, 2008: 1-36). The second is financial innovations. The development of financial products such a bank off balance sheet innovations, collaterised debt obligations, and the creation of large derivatives/futures markets has meant that financial institutions were able to often hide the substantial losses gained at the betting of leveraged money on such sectors as the subprime mortgage market (Jagtani, 1996: 7-41). It seems consequently obvious that any financial institution that wanted to make the most amount of profit in the shortest amount of time, would if allowed by legislation, and enabled by financial products engage in financial behaviour that was profitable in the short term, but not the long term. This hypothesis is vindicated in the recent financial crisis, with a large chunk of the financial bubble being made of securitised subprime mortgages of houses that had little to no collateral invested in them (Taylor, 2009: 1-7). One finds, therefore, that simultaneous deregulation and financial development produced profit that became largely abstracted from the real world; much of this financial development was not tied to any real capital- it was fabricated by these high leverage rates (Skidelsky, 2009: 9-19).