Money · Credit · New Zealand · Part 8

Who should benefit from credit creation?

Once we accept that commercial-bank lending creates deposits, another question follows: where does that new credit actually go?

This is not a small question.

Credit helps determine who can buy assets, who can invest, which firms can expand, which projects get built and which balance sheets grow.

So the amount of credit in an economy matters.

But so does its destination.

Credit allocation is not neutral. It shapes what the economy finances.

Start with the actual numbers

Reserve Bank data for June 2026 shows New Zealand registered banks had about $615.1 billion of loans classified by purpose.

Of that:

$395.4 billion was housing lending.

$133.4 billion was business lending.

$63.6 billion was agriculture lending.

$7.3 billion was personal consumer lending.

$14.0 billion was lending to financial institutions.

$1.4 billion sat in other lending.

Housing therefore represented about 64% of this purpose-classified bank lending stock.

Reserve Bank — Banks: Assets, Loans by Purpose ↗

That does not mean housing credit is automatically bad

Housing matters.

People need somewhere to live.

Mortgage finance allows households to purchase homes without saving the full purchase price in advance.

Investor lending can support rental housing.

Housing-related finance can also support new construction.

But we need to distinguish between different economic effects.

A mortgage used to purchase an existing house mainly finances a transfer of ownership of an existing asset.

A loan used to build new housing can contribute directly to additional housing supply.

Those are not the same economic activity, even though both may sit somewhere inside the wider housing-credit system.

Credit can affect asset prices

The Reserve Bank notes that rising house prices often come with increased mortgage lending, and that high levels of mortgage debt relative to borrower income or property values can increase risks to financial stability.

Reserve Bank — How house prices affect the economy ↗

This does not mean every dollar of mortgage lending mechanically raises house prices.

House prices are affected by supply, population, incomes, interest rates, expectations, tax settings, land-use rules and many other factors.

But when credit is readily available to bid for an asset whose supply cannot expand quickly, financing conditions can become part of the price dynamic.

Credit can finance production. It can also finance competition for assets that already exist.

Business credit is not automatically productive either

It would be equally simplistic to say that housing lending is unproductive and business lending is productive.

Business credit can finance:

working capital,

inventory,

machinery,

technology,

new premises,

commercial property,

acquisitions,

or simply refinancing existing debt.

The Reserve Bank's June 2026 data shows about $48.7 billion of business lending was classified as commercial property, while about $84.7 billion was classified as other business lending.

Reserve Bank — Business lending by purpose ↗

So the label on the loan is only the beginning of the analysis.

The real question is what the borrower does with the capital and whether it adds economic capacity, resilience or value.

New lending gives us another snapshot

The Reserve Bank's New Credit Flows survey recorded about $16.1 billion of new lending or facilities loaded in June 2026.

Of that:

$8.3 billion was lending fully secured by residential mortgage.

$3.9 billion was business lending.

$3.1 billion was agriculture lending.

$236 million was personal consumer lending.

The residential-mortgage-secured category was therefore a little over half of that month's recorded new lending.

This is only a monthly snapshot, not a complete statement about the long-run direction of credit.

Reserve Bank — New Lending by Purpose ↗

Why access to business finance matters

Treasury's recent productivity research says New Zealand remains relatively capital shallow and identifies access to finance as one of the channels that can affect capital intensity and technology diffusion.

More technologically sophisticated investment can help firms produce more with the labour they already have.

Treasury — Innovation, capital and productivity in New Zealand ↗

That does not mean government should simply order banks to lend more to every business.

Bad business lending creates losses just as bad mortgage lending does.

But if viable firms cannot access capital for equipment, technology, export growth or expansion, the economy can lose productive opportunities.

Small businesses face a particular issue

The Reserve Bank's May 2026 Financial Stability Report says small firms make up a disproportionately low share of bank business lending relative to their contribution to economic activity and employment.

It also says around $5 billion of lending to smaller businesses is secured against owners' residential property, equal to about 11% of bank lending to SMEs when agriculture and commercial property are excluded.

Reserve Bank — Financial Stability Report May 2026 ↗

That relationship is worth thinking about.

If business owners often need housing equity to obtain business finance, then access to entrepreneurial credit can partly depend on whether someone already owns property.

Housing wealth and business finance are therefore not completely separate systems.

An economy should care when the gateway to business capital is partly determined by whether the entrepreneur already owns a house.

Agriculture matters too

Agriculture accounted for around $63.6 billion of bank lending in June 2026.

That capital supports farms, land, equipment, working capital and one of New Zealand's major export-producing sectors.

But agriculture also shows why simply calling something "productive credit" is not enough.

Highly leveraged productive assets can still create financial risk.

A project can generate exports and still be a poor loan if debt service is too high or commodity prices fall.

Productive purpose does not eliminate the need for risk discipline.

So should government direct bank lending?

Not loan by loan.

Commercial banks exist partly to assess credit risk and allocate private capital.

A political system deciding which individual company deserves a loan would create obvious risks of favouritism, poor underwriting and politicised credit.

But that does not mean public policy is absent from credit allocation.

Policy already affects lending through:

bank capital rules,

liquidity requirements,

the Official Cash Rate,

loan-to-value restrictions,

debt-to-income restrictions,

tax settings,

government guarantees,

housing and planning policy,

competition policy,

and public investment institutions.

So the real policy question is not whether government influences credit.

It already does.

The question is what objectives and safeguards should govern that influence.

What should good credit allocation achieve?

I think there are at least five tests.

1. Financial stability. Credit should not be expanded in ways that create systemic fragility.

2. Additional capacity. Where possible, finance should help create housing, businesses, infrastructure, technology, exports and productive assets rather than simply inflate the price of scarce existing assets.

3. Sound risk pricing. A socially desirable project is not automatically a creditworthy project. Risk still has to be measured and priced.

4. Access. Viable borrowers should not be excluded unnecessarily because of weak competition, information barriers or a lack of traditional collateral.

5. Accountability. If the public sector takes credit risk, subsidises finance or guarantees lending, the purpose, exposure and outcomes should be transparent.

Credit policy should not become cheap-money policy

There is an important trap here.

If government decides a sector deserves more investment, the easiest-looking solution is often to make credit cheaper.

But cheap credit can create its own problems.

If the underlying supply constraint is land, labour, energy, consenting or materials, easier finance may simply increase prices rather than output.

This takes us back to Part 6.

The financial constraint has to be the actual constraint before financial intervention will solve the problem.

What about public investment banks or development finance?

There can be a case for public or co-investment institutions where there is a clearly identified financing gap, public benefit or market failure.

But the standard should be higher, not lower, when public money is involved.

A serious institution would need:

an explicit statutory mandate,

independent credit governance,

clear risk limits,

transparent accounts,

commercial discipline where appropriate,

published performance measures,

and protection from day-to-day political lending decisions.

Otherwise "strategic credit" can quickly become a way of hiding bad investment.

The deeper question

New Zealand does not need to decide that housing is bad and business is good.

That is far too crude.

We need housing finance.

We need business finance.

We need agricultural finance.

We need consumer credit.

We need infrastructure finance.

The more intelligent question is whether the overall financial system is helping the country build enough new productive capacity while remaining stable and accessible.

The question is not only how much credit we create. It is what exists after the credit has been used.

My conclusion

Credit creation should ultimately benefit the economy by financing activity that households and businesses can sustain and that leaves useful assets, services or productive capacity behind.

That does not require government to choose every loan.

It does require us to understand that regulatory settings, collateral rules, tax policy, planning rules and public institutions all influence where credit flows.

So when we talk about monetary and credit capacity, we should ask not only:

How much can the system finance?

But also:

What are we financing?

What does it produce?

Who gets access?

Who carries the risk?

And what does New Zealand have to show for the debt afterward?

Next

That leads to the institutional question.

Could New Zealand design better public-investment institutions?

Part 9 will look at the difference between ordinary government spending and institutions designed specifically to mobilise capital into long-term investment.

We can then examine models such as Crown investment entities, development banks and international public investment institutions — including what works, what fails and what safeguards would be essential in New Zealand.

Primary sources

Reserve Bank — Banks: Assets, Loans by Purpose ↗

Reserve Bank — New Lending by Purpose ↗

Reserve Bank — Financial Stability Report May 2026 ↗

Treasury — Why not both? The effects of innovation and capital on productivity ↗