By Gareth Vaughan
Reserve Bank Governor Adrian Orr has hit out at the New Zealand Bankers' Association (NZBA) over a comment made in the bank lobby group's submission on the Reserve Bank's bank capital proposals.
The comments came from Orr in a press conference following the release of the Reserve Bank's Financial Stability Report on Wednesday morning. Orr was answering a question about NZBA's claim that the Reserve Bank's proposals to increase banks' regulatory capital requirements could cost households, businesses and the economy about $1.8 billion a year.
After indicating he didn't agree with this, Orr said: "What was one of the interesting ones from NZBA? That at the end of the day if banks fail it should be our fault and we should pay them out anyway."
This, he said, was in NZBA's submission which he found "astounding."
He was referring to a comment in a report by Sapere Research Group that was commissioned and submitted by NZBA. It outlines a bank crisis scenario where it's suggested the Government, meaning taxpayers, should take the hit rather than bank depositors. Note, bold added by me for emphasis.
"We have some concerns that the OBR [Open Bank Resolution policy] is being assumed to provide a ‘bail in’, whereas it seems to us highly unlikely that any government would allow all depositors in a major bank to take a haircut. Depositors would have a right to argue that the Reserve Bank should have seen this coming and that as the government’s designated regulator of the banks, the government should take the hit rather than the depositors. Depositors are poorly placed to monitor the performance of their banks in contrast to the regulators who have better information and a duty of care to the depositors. Requiring banks to hold additional Tier 1 capital would seem unlikely to be the most efficient method for managing these risks," the Sapere report argues.
The main author of the report is former Treasury Secretary Graham Scott.
In response to Orr's comments an NZBA spokesman said the lobby group's submission did not suggest the government should pay out in the event of a bank failure.
“Dr Graham Scott, who is an independent economist, speculated in his report, in the event of a bank failure, the Minister of Finance may decide against invoking Open Bank Resolution. In this hypothetical scenario the government may choose to meet the costs of the bank failure instead of depositors taking a haircut. Dr Scott did not suggest that this should be policy and this part of his report was not referenced in NZBA’s submission," the NZBA spokesman said.
“We have clarified this with the Reserve Bank.”
The Reserve Bank proposals announced in December would see NZ banks - led by ANZ NZ, ASB, BNZ and Westpac NZ - required to bolster their capital by about $20 billion over a minimum of five years. For background and detail on the proposals and bank capital in general, and the nuts and bolts of what's proposed, see our three part series here, here and here. Additionally the Reserve Bank proposes to designate the big four as systemically important banks meaning they'd have capital requirements above and beyond other banks.
The deadline for submissions on the capital proposals was May 17, and the Reserve Bank says an announcement is planned by the end of November, with implementation of any new rules starting from April next year.
"There are a lot of interesting assumptions across a lot of the submissions, particularly from those who are the ones who may be facing higher capital requirements," said Orr.
Nonetheless Orr said the regulator is "open minded" and has been "right from the outset."
"If we see sufficient reason to be changing any of the parameters we will and we will make it clear why we did," Orr said.
"We are wide open to do the right thing by the country. But we want more capital, we want good quality capital in this country because it's the well capitalised banks that are in the long-term the most sustainable and profitable."
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13 Comments
Whether it is depositors or the Government the money is coming out of the pocket of the general public.
OBR is where a bank is not going to completely collapse but needs to be recapitalised. OBR can be implemented in a variety of ways.
1) A percentage of depositors money can be taken.
2) A percentage of deposits can be "taken"by converting them into shares, bonds or another financial instrument.
3) Or the government could refuse OBR and loan money to the bank or forcibly issue then buy bank shares.
Options 1 and 2 correctly focus customer anger at a mismanaged and failing bank. Option 3 focuses anger at the Government for socialising the risk of a mismanaged bank.
Overall Option 2 is the best where the customers are angry at the bank and hold either a debt claim or shareholding in the bank. Converting deposits to shares would be hilarious. Imagine the bank's AGM and a large block of angry customers voting against the recommendations of the board.
Here's a detailed look at how OBR may work if it's ever used - https://www.interest.co.nz/bonds/64411/if-bank-failed-and-open-bank-resolution-policy-was-implemented-how-would-it-affect-bank
Sure, no government would want that.
But what happens if one or more of the Oz banks fails? Would it's subsidiary in NZ also fail... it's likely.
Read this article in the Irish Examiner:
Parallels with Ireland's recent history uncanny as Australia faces possibility of systemic crises.
https://www.irishexaminer.com/breakingnews/views/parallels-with-ireland…
Adams and North interview the author here:
https://digitalfinanceanalytics.com/blog/the-irish-are-convinced-that-t…
Over the last four years RBNZ cut the OCR in half while the credit risk attached to bank deposits was overtly rising because of high risk bank lending practices. In a free market not dominated by a "stimulus" fixated state enterprise short end interest rates would normally seek a level to offset the capital risks (OBR haircuts) potentially attached to bank deposits.
This is the inevitable case of the banks exercising their muscle. It is a consequence of too light regulation for too long, allowing them to become too powerful. The statement that Orr highlights is astounding because it has an implied threat. I wonder what the 'or else' is? (Could or would the parent engineer or cause the collapse of its NZ subsidiary?)
I have long argued that depositors funds should remain the property of the depositor, and that the bank then will become liable to the depositor for those funds. Much more than just being an unsecured creditor. The banks would not then be able to claim them as 'profits'. The change in the face of banking that i would expect from this would be each bank providing assurance to their client base, that deposits are both safe and that they are invested wisely for a fair return. I would also envisage that this would make the banks easier to monitor and regulate as a robust set of standards that can be audited against would validate or repudiate such claims. None of this happens currently.
Its not simple but the ultimate solution is QE as the RBNZ is the bank of last resort. Banking is entitled by the market enacted by statue law. The reserve bank can step in as in the case of BOJ buying on market stock, The fact is once reserve banks moved to be buyers of last resort the game was up.
"Banking is entitled by the market enacted by statue law." How is this different from any other business? I do get that there is a set of legislation that applies to banks, but i suggest that the current times indicate that that legislation needs to be reviewed and brought into line with public expectations. The fact that banks can even consider that they can dictate public policy or at least strongly influence it suggests that things are well out of hand and have been for some time. The RBNZ buying up shares is, in my view, a highly undesirable situation, and would be a virtually impossible goal anyway. QE has also been shown to create problems of its own, and tends to further prop up the banks and the wealthy at the expense of everyone else. No, I think the better options are through tightening the regulatory leash.
The banks have no problem posting record "profits", earnt from money they dont have, and based on supposed value of assets in homes and businesses.
Their arrogance to having to store a little bit of capital is not surprising given the free ride they have been on.
The fact is that personal debt is close to maxing out with a lot of mortagees having DTIs of 7 & 8. When there becomes no way to grow debt further of course the chance of banking collapses become more of a reality, it only takes a small recession, loss of jobs and it all starts falling apart.
I commend the RBNZ for this initiative and hope that its not too late....
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