Recent Reserve Bank efforts to explain the "speed limits" on high loan-to-value lending appeared to reveal "substantial public surprise" about the central bank's forecasted future rises in interest rates, RBNZ Deputy Governor Geoff Bascand said today.
In a speech in Auckland about the RBNZ's communications policies and strategies, Bascand said that because the RBNZ might reach one audience effectively (in this instance financial markets) - this "does not guarantee we have reached another".
"A recent foray into the 'public audience' via an opinion article explaining the LVR policy, that repeated our monetary policy expectations [and referred to mortgages possibly hitting 7% to 8%], appeared to reveal substantial public surprise about our interest rate projections," Bascand said.
"While unintentional, it therefore possibly enhanced the projection’s impact.
"Achieving both accessibility and credibility, while simultaneously communicating with both the general public and financial markets, can sometimes create tensions."
He said the RBNZ was deeply committed to transparency and saw clear communication as vital to making its actions more effective.
"We are working to enhance the openness and effectiveness of our communications."
Central banks’ communication strategies and their ability to communicate effectively had been challenged enormously by the events and consequences of the Global Financial Crisis, the introduction of macro-prudential policy, the emergence of new technology and social media, and in New Zealand’s case by expanded regulatory responsibilities for insurance and the non-bank deposit-taking sector.
“Complexity has increased, audiences have expanded, and the immediacy and saturation of news coverage has turned the volume control on full,” Bascand said.
The Reserve Bank had adapted its communications to recognise significant interest shown in the Bank’s policy settings, policy objectives, tools, and governance.
A recent study reported that the Reserve Bank of New Zealand is the second most transparent central bank in the world, just behind the Swedish central bank.
Bascand said the new LVR limits had "required a fresh understanding and enhanced communication".
"New policy frameworks pose special challenges to build understanding of their efficacy, conditionality, and operation. Faced with rising house price inflation on top of seemingly already over-valued house prices, the Bank moved quickly to institute new policy measures."
The RBNZ had "set the scene" for these measures in a number of on-the-record speeches in advance, as well as remarks at press conferences, and in Monetary Policy Statements and OCR statements "about our concerns with easier lending standards and house price inflation".
Following the introduction of the LVR limits the RBNZ had carried out "sustained" communications about their operation, rationale and objectives in further speeches, media interviews, and the November Financial Stability Report.
'Significant commentary'
"The introduction of LVR restrictions has attracted significant commentary from many different quarters. Some analysts feel there has been a blurring of financial stability and monetary policy objectives. Others have questioned the Bank’s operational policy design, its distributional impacts, and the legitimacy or autonomy of its decision-making.
"Some have credited the Bank with policy innovation and the willingness to act before a crisis eventuates.
"We have reiterated that LVRs are targeted at the primary objective of financial stability, but that there is also a potential benefit for monetary policy if they reduce the spillover of house price inflation into stronger consumer demand and higher price inflation for goods and services."
Bascand said explaining important inter-dependencies with other policies – "our own or wider government ones" – was vital.
"It is well-known that monetary policy 'needs friends', as the saying goes, particularly supportive fiscal policies.
"Macro-financial (or macro-prudential) policies can also benefit from supportive micro-economic policies (e.g. productivity, housing, tax, regulation, etc) whereby these reduce risks and enhance the economy’s growth capacity and performance. In these circumstances, we endeavoured to support policies that promoted housing supply, as a goal, without commenting on specific policy proposals."
Transparency may work against financial stability
Talking of more general issues, Bascand said there may be occasions where complete transparency may work against the interests of financial stability, "for example if a problem at a bank precipitated a run before the bank and the authorities had a chance to correct or at least clarify the problem".
"There are strong grounds, therefore, for seeing financial stability communication in normal times as different from that applying during times of crisis."
Bascand said in the event of an institutional failure or rescue, the RBNZ decisions can be reviewed after the event.
"No rescue operation would be undertaken without wider public sector involvement, since taxpayer funds are at stake. Normal public sector accountability mechanisms (annual or ex-post reporting, audit, select committee examination, etc) operate in such a case.
"Transparency of the Bank’s financial stability activity is also limited by the requirement on us as a supervisor to maintain confidentiality of information that institutions provide to us. This means that, generally speaking, we cannot reveal the nature of discussions or correspondence with a supervised entity, both to protect commercial confidentiality and to ensure entities feel safe in talking with us."
Expanded responsibilities
Bascand also talked about the RBNZ's expanded regulatory responsibilities, in particular regulating nonbank financial deposit takers (NBDTs) and licensing and supervising insurance companies.
"The Bank’s stakeholder engagement has changed significantly, whilst expectations upon it and its public persona as a guardian of financial soundness and efficiency have been magnified considerably."
In terms of expanded regulatory responsibilities, the communication challenges to date had been more stakeholder management related (understanding the regimes’ operation and building trust in our regulatory relationship) rather than widespread public discourse. Taking on additional regulatory responsibility for insurers and non-bank-deposit takers meant dealing with everyone from bank chief executives to building societies to small mutual insurers.
"These regulatory responsibilities were assigned to the bank out of a concern to avoid financial failings, such as we saw with finance companies and in the insurance sector.
"The challenge here is that public expectations may well be at odds with regulatory and supervisory responsibilities and realities.
"We have communicated that we do not operate a no-failure regime, as well as explaining our responsibilities vis a vis the Minister of Finance and other institutions such as the Financial Markets Authority.
This isn't a 'no failure' regime
"I suspect we have many communication challenges ahead to reach public understanding that the Reserve Bank’s regulatory and supervisory oversight does not represent a ‘no failure’ regime, and that there are no guarantees that insolvencies and other forms of business failure will not occur. This extension in regulatory and supervisory responsibilities will demand new channels, new audiences and new messages."
Bascand indicated that the RBNZ was introducing "a regular stakeholder survey", though didn't give an indication of when.
"The Swedish central bank (Riksbank) has a long history of conducting a two-yearly stakeholder survey and we can benefit from following their practice.
"The survey will help us understand whether we are sufficiently clear in our communications, and the level of credibility attached to them. It will also help us assess whether we prioritise the right communication channels. A key benefit will be the constructive broadening of our audiences, as stakeholder analysis will require us to gear our communications to a multiplicity of stakeholders."
19 Comments
Very well explained by Mr Bascand - for the majority on here I suspect it's telling them nothing new, but for the one or two obvious cases on here that need a better understanding, a reminder of the key points he's making here:
- too many of the public are oblivious to what the RBNZ plan to do with monetary policy despite them providing a spread sheet every MPS that shows when they plan to hikes rates if things continue to pan out as expected. That time is now rapidly reducing to only 4 months away, and the recent data keeps coming out even stronger than the RBNZ's forecasts i.e. Barring a global blow up its just months away.
- LVRs are designed to protect the financial system and is not a replacement for monetary policy i.e. It may soften a hiking cycle if we're lucky, but it won't stop it
- this isn't a no failure regime. And he isn't just talking about the financial system, he's talking about businesses and households. When they put up rates they know some will get hurt, frankly it's mean't to... .it will not stop them from doing what they see fit to meet their targets because in the long-term that's what's best for the country. Forget what you think about what they should do, or what harm it may do to you, it will happen. Make sure you're not one of those hurt.
I only hope that some in the mortgage belt that don't understand basic monetary policy are either lowly leveraged if floating, or have at least taken some degree of protection of their position. Otherwise they're just sitting there hoping in the deluded believe that their situation is typical of the whole country and bad things can't happen to them.
Totally agree GrantA. It might appear paternalistic to take away the punch bowl, or at least slow down the inflow of vodka, but the RB, and Wheeler in particular based on his US experience, clearly feel excessive mortgage credit poses a risk to the banking system and a major risk to low equity borrowers in the form of negative equity.
If those borrowers are ignorant of the risk or willfully blind to it, does the RB let them plow on regardless and potentially crash the entire economy or step in to lessen the risk.
Personally I think the credit bubble has been allowed to become too big to correct without major pain for a lot of people. The big question is how that pain will be spread around. At the moment banks and large borrowers alike are fighting for "too big to fail" status and for whatever reason both Labour and National agree.
You don't get it Zanyzane. The banks make bigger profits when interest rates are lower because there is more demand for credit and less pressure to fight for marketshare by compressing their margin. The trading banks don't want a higher OCR. Profit from credit is demand (volume) x margin. The OCR doesn't affect their margin significantly, only the volume. That is why the banks hate the LVR restrictions because it affects volume directly.
So why have banks been making record profits with interest rates at record lows? Hint: because the lower the rate more people like yourself borrow larger amounts and higher volume means more fees etc as well as more credit.
Quite why you don't like banks is beyond me. You are in a symbiotic relationship. You both want lower interest rates to make more profit. Them from volume of lending and fees and you from leverage and credit demand pumping up prices. You both want to be too big to fail
Console yourself and think about the crap they will be in if either prices drop significantly, the kiwi dollar weakens significantly or their interest rates go up; or likely in another crisis all three together. Look what happened in Eastern Europe and Iceland to buyers borrowing in foreign currency. Their mortgages or car loans doubled. The NZD often corrects 20% or more in a short space of time. They won't all be able to exit at the same time.
Unfortunately wtf, ZZ makes comments about bank margins, but despite repeated requests for him to give us an idea of what the banks actual margins are, he avoids a response or changes the subject. What he doesn't get is that the NZ banks cost of floating funds is above 4% and their direct margins less than 150 basis points. Compared that to more liquid global markets with cost of funds at about zero and you start making realistic comments that someone may actual think worth considering.
"Transparency of the Bank’s financial stability activity is also limited by the requirement on us as a supervisor to maintain confidentiality of information that institutions provide to us. This means that, generally speaking, we cannot reveal the nature of discussions or correspondence with a supervised entity, both to protect commercial confidentiality and to ensure entities feel safe in talking with us."
Equally, the lack of transparency prohibits unsecured lenders (depositors) investigating their true exposure in the event of local bank insolvency - the RBNZ's failure to advertise the realities of the bail-in provisions contained within OBR is an inexcusable oversight - as an habitual investor I took the precaution to move my unsecured bank term deposit funds into NZ Government Tbills. It seems NAB were just as uncomfortable with unsecured loan extensions to the local BNZ branch system.
"We have also diversified our funding sources enough to repay all the senior unsecured funding lent to us by our parent, National Australia Bank (NAB)," Duarte said. Read more
How is the general public positioned in their haze of ignorance?
I don't think the RBNZ has really considered the public as having an independent thought process. They assume that if they say things are fine then we will believe them. Worse they think their delusions about how the system works are much better than our delusions and that their actions are more important than ours.
Personally I think they have been drinkers Banker's Cool Aid. The big banks do not have adequate capital to survive even a moderate break in the chain of derivative payments as far as I can tell. They only survived last time because the chains they were in were patched up overseas.
The big bank system is far too complex for the RBNZ or anyone else to understand. They think this is a sign of sophistication whereas I see it as systemic fragility.
What to do:
1 Require a capital haircut on all derivative postions (they are debts and hedging only covers some known risks, risks are known and unknown).
2 Loan advances to be less than 100% of deposits within a defined timeframe.
3 Monetary policy to include the objective of keeping debt creation less than nominal GDP in order to reduce the overall indebtedness of New Zealand over time.
The current system they have hatched is a recipe for bank runs at the next crisis. I note in the article below it mentions "higher than forecast issues of circulating currency," http://www.interest.co.nz/bonds/67701/treasury-reports-budget-deficit-a…. Is someone pre-positioning in cash?
At the moment most people are not paying attention to the dramatic increase in risk to depositors but when the next crisis arrives you can be sure they will. Deposits will exit the Aussie banks and head straight to Kiwibank as people will figure that's the safest place to be. More sophisticated depositors will move money to Australia if they have guaranteed accounts there and lines will form outside ATMs. Covered bonds will be seen as the lowest form of stupidity.
Bollard said in his book Crisis they mainly got through on luck. Without the RB's massive liquidity injections the trading banks were toast. Great business model for some. Can't recall too many other kiwi businesses being propped up by the RB in 2009 with emergency cash injections.
Yep that transparency issue doesn't tie in with the expectation under the OBR that depositors are responsible for their own due diligence on any given bank's financial status.
The RB in order to prevent a run would also disguise any problem at a bank right up to the point of failure, just like the finance companies. Tough luck if you deposited hours before the OBR was imposed based on incomplete or unavailable "commercially sensitive" information.
Yes. I wonder how far this proposal will travel in the US law making process?
In a defeat for Wall Street, the "Volcker rule" won't allow banks to enter trades designed to protect against losses held in a broad portfolio of assets, according to people familiar with the rule. The practice, known as portfolio hedging, has become a focal point of regulators drafting the rule, a controversial plank of the 2010 Dodd-Frank financial law that seeks to prevent banks from putting their own capital at risk in pursuit of trading profits. Read more
Nope not off the top of my head Stephen, but I will get that for them. I've not close to that these days to be up with it. However, the top of head basis that I did work on though was what I was fully aware is about the average of the banks current funding margin above wholesale across all funding sources(120-150bps).
Of course thats what it is now based upon what funding they locked themselves into over the past 3-7 years (when funding costs were much higher) and so over time that average will be coming down. So what a 3yr euro financing swapped back into Kiwi is currently at is a bit academic as it just goes into the mix, but the mechanics of that might be of interest. My main point is, based upon some direct posting made by one or two on here over the past 1-2 years, they don't undestand that banks don't fund at or even close to the OCR - mine has beene an unsuccessful attempt to make them understand that is not the case before they go making totally uninformed statement as one has here.
ZZ - I'm not exactly sure what you refer to as "robotic and static analysis" but I think you might be a bit guilty here of looking at the little picture in focusing only on the timing of how banks move their rates. What I can tell you, whether you want to accept it or not, banking in NZ is ultra competitive and banks have only so much leeway in how long they can retain a margin gain until the another bank moves first, which is usually early. Not you, but the one or two others on here have been getting excited because the banks undertook a period of further margin compression over the past month or so trying to protect or grow their market share before rate hikes next year - some posters even called it rate cuts and were suggesting it was a trend as if the bank set the main level of rates...banks dont, investors in banks do. Assets aren't growing, and what's out there is only the other banks market share, and they want it, and will do deals to get it....those that don't ask don't get, or aren't attractive.
Big picture is that unless something major happens, sometime in the 1st half of next year the OCR will be heading in the same direction as longer-term rates already have over 2013, i.e. up, but hopefully only modestly in a controlled manner. Bank margins here remain healthy (what do you want) but globally competitive particularly compared to some countries where frankly they dont want to lend to anyone.I wouldn't particularly like to see that here for worthy borrowers....they are effectively treating everyone like an NZ high LVR borrower, hence the reason US and european banks are hoarding cash with their central banks.
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