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Graphic: An Encyclopaedia of New Zealand 1966.


This information was published in 1966 in An Encyclopaedia of New Zealand, edited by A. H. McLintock. It has not been corrected and will not be updated.

Up-to-date information can be found elsewhere in Te Ara.



The Reserve Bank

Various factors account for the importance of banks in the economy but the major one is undoubtedly their unique capacity to create credit, though within certain defined limits. In fact, it is this capacity which principally distinguishes a bank from other financial institutions. Variations in the cost and availability of trading bank credit play a significant role in affecting domestic economic conditions.

The establishment of the Reserve Bank of New Zealand, which opened for business in August 1934, among other things reflected widespread concern over the control of money and credit in New Zealand. There had also been criticism over the fixing of the New Zealand exchange rate which, until then, had been left to the trading banks. When first established, the Reserve Bank was privately owned but an amendment in 1936 to the original 1933 Act abolished private shareholdings in the Bank which became, and has since remained, State owned. Over the years there have been changes both in the statutory functions of the Bank and in its methods of giving effect to them. At the present time the Reserve Bank's primary functions, as defined in section 8 of the Reserve Bank of New Zealand Act 1964, are:

  1. The primary functions of the Bank shall be:

    1. To act as the central bank for New Zealand; and

    2. To advise the Government on matters relating to monetary policy, banking, and overseas exchange; and

    3. Within the limits of its powers, to give effect to the monetary policy of the Government as communicated in writing to the Bank under subsection (2) of this section, and to any resolution of Parliament in relation to that monetary policy.

  2. For the purposes of this Act, the Minister may from time to time communicate to the Bank the monetary policy of the Government, which shall be directed to the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade, and employment and of maintaining a stable internal price level.

  3. The Bank may, on behalf of the Government, regulate and control:

    1. Money, banking, banking transactions, credit, and currency:

    2. Rates of interest in respect of such classes of transactions as may from time to time be prescribed:

    3. Overseas exchange and overseas exchange transactions.

Under the same Act, the Bank is required “to endeavour, within the limits of its powers, to maintain, in addition to any holdings of gold, an adequate level of overseas reserves”, and to keep the Minister of Finance informed of the overseas exchange position and prospects, and of the level of overseas exchange reserves it regards as adequate.

The Bank is thus both adviser on and executant of monetary policy. It has of course several other functions which may be summarily tabulated as follows:

  1. Managing the note and coin issues.

  2. Managing the public debt and acting as Registrar of Government and Local Authorities Stock through its Chief Accountant.

  3. Acting as banker to the Government and to various marketing organisations (but not to private firms or individuals) by receiving deposits, operating current accounts, extending credit, and handling overseas exchange transactions.

  4. Undertaking economic research and analysis, particularly of the current and prospective economic situation and compiling and publishing statistics, particularly relating to banking and overseas exchange transactions.

The main techniques used by the Reserve Bank to influence the amount of credit extended by the trading banks and hence the level of expenditures comprise:

  1. Changes in the reserve ratios, which determine the amount each trading bank must maintain in its account at the Reserve Bank.

  2. Changes in its discount rate which is also the rate the trading banks pay when they are required to borrow from the Reserve Bank to maintain their statutory minimum balances.

  3. Selective control over trading bank advances.

The extent to which a bank can extend credit which, when used by its customers, will cause it to lose funds to other banks, is determined by the amount of cash it holds at the Reserve Bank and its ability to borrow at the Reserve Bank's discount rate; hence these techniques constitute a powerful armoury. Certainly they are blunt in comparison with techniques used in some other countries, and it is true that they have not prevented large expansions in bank credit at various times. While, however, they might be improved, they are likely to remain the main techniques in use.

In addition to such powers in respect of the five existing trading banks, authority was given in 1964 for the Governor-General, by Order in Council, on the recommendation of the Minister of Finance made after consultation with the Governor of the Bank, to declare any person or class or persons carrying on as their principal business the business of banking, to be trading banks for the purposes of the Act. This authority would apply to a new trading bank or to a branch of an overseas trading bank as well as to any other business which became, in effect, a trading bank.

To enable the Reserve Bank to obtain information on the activities of the “fringe-banking” institutions and exercise some degree of control over their activities, the Bank is authorised to request any person or class of persons who (as a substantial part of their New Zealand business, accept deposits or carry on any banking business, or grant credit or make loans for the financing of industry, trade or commerce) to supply information concerning such business. The Bank may also make recommendations to them concerning the policy to be followed in respect of such business. With the prior authority of the Minister, the Bank may by notice in the Gazette require such information to be supplied. It may not, however, request or require any such person to disclose the identity of any particular customer.

In considering central bank methods of control, account must also be taken not only of the particular economic environment in which they are operated but also of the fact that the cost and availability of bank credit is but one of several factors affecting the demand side. More important are such factors as business expectations, the availability of goods and services, fiscal policies, and the levels of wages and other incomes.

The directors of the Reserve Bank are the Governor and Deputy-Governor, the Secretary to the Treasury, and seven other directors. There are four departments (Chief Accountant's, Chief Cashier's, Economic, and Secretary's), two branches (Auckland and Christchurch), and a staff of about 450. The Bank's head office is in Wellington. Its main overseas business is conducted through the Bank of England, which is its agent, and with other central banks. In New Zealand the Bank of New Zealand acts as agent in certain matters.