By Gareth Vaughan
The Reserve Bank is reviewing the statements made by bank directors in public disclosures to make sure they're reliable and accurate and the system can't be gamed.
In a speech to bank lobby group the New Zealand Bankers' Association, Reserve Bank head of prudential regulation Toby Fiennes also said the Reserve Bank is considering making more data received privately from banks publicly available. And Fiennes again defended the central bank's anti-deposit insurance stance, and lack of onsite bank inspections.
Fiennes said four areas of the bank's supervisory practices are under review.
"First, given its importance in the [prudential supervisory] framework, we intend to review the attestation regime for banks. We want to confirm that the attestations provided by bank directors in their public disclosures are reliable and accurate. We intend to undertake a thematic review of the attestation process [looking at] how effective and comprehensive these systems are. We will work collaboratively with banks and their boards, recognising that it is in all parties’ interests that the regime works efficiently and robustly," Fiennes said.
Secondly, Fiennes said the Reserve Bank is probing establishing more consistency in its oversight of banking, insurance and non-bank deposit takers (NBDTs).
"In particular, as part of the review of the Insurance Prudential Supervision Act (2010) we will consider bringing some of the practices we have found effective in banking regulation across to insurance. We will look at the merits of an attestation regime for insurers as a way of bolstering self discipline. We will also examine whether a stronger role for disclosure for insurers will be a cost-effective way of bolstering market discipline," said Fiennes, adding, "We want to explore areas where the legislation or our approach may have unintentionally imposed unnecessary costs on insurers."
Considering more focus on areas where 'the incentives on financial institutions differ most starkly from society’s interests'
Additionally Fiennes said the Reserve Bank will mull shifting its supervisory effort towards areas where "the incentives on financial institutions differ most starkly from society’s interests."
"These areas mostly relate to failure prevention and resolution. In the case of banks they include OBR [open bank resolution policy], outsourcing, liquidity and capital; and in the case of insurers they include solvency and reinsurance. Conversely, we may decide to do less intensive supervision of areas where incentives are better aligned," Fiennes said.
Fourthly, he said the Reserve Bank is evaluating how to strengthen disclosure in the banking sector, which could involve making more information collected by the Reserve Bank privately available publicly.
"As previously noted, we have increased our engagement with boards and management of supervised entities, and widened the amount of private data we receive from banks. This has been a conscious move. A trade-off exists between speed and accuracy - the private information we receive tends to be provided quickly, but without the checks and validations that go with formal disclosure," said Fiennes.
"Having said that, we will investigate whether more of the quantitative data we currently receive privately could be publicly disclosed, via the ‘dashboard’ project. We are developing the dashboard as an accessible, electronic repository which would allow data to be compared across banks in a consistent and timely way. We may look at including, for example, large exposures, bank liquidity and LVR [loan-to-value] information in the dashboard. If the information can be presented accessibly and consistently across banks, is accurate and not commercially sensitive, we will be looking to include it."
'Depositors and policyholders may suffer losses'
Fiennes reiterated the Reserve Bank's opposition to deposit guarantees, or deposit insurance, having previously done so as recently as February. New Zealand is an outlier within the OECD in not having deposit insurance. He suggested there's "solid international evidence" showing the absence of guarantees improves the overall stability of the financial system, pointing to a World Bank working paper from 2012 entitled How Does Deposit Insurance Affect Bank Risk?
"...In supporting market discipline, we do not guarantee that no financial institution will fail, and we do not have explicit customer protection. While the New Zealand financial system is sound, history tells us that banks, NBDTs and insurers can, and do, fail. Consequently, depositors and policyholders - both wholesale and retail - may suffer losses. Our mandate is soundness and efficiency of the financial system as a whole. The growth and demise of individual institutions in accordance with the competence of their management and demand for their services are a natural part of a competitive and efficient economy," Fiennes said.
"Since no financial institution is guaranteed by the government, there is more market pressure on institutions to compete on safety than there would be in a system with guarantees."
In a report on the New Zealand banking industry last month, credit rating agency S&P Global Ratings said the lack of a deposit insurance scheme puts New Zealand in a relative weaker position compared to other high income countries that have deposit insurance schemes in place such as Australia.
"In our view, the absence of a deposit insurance scheme heightens the risk of a run on the banking system," S&P said. (There's also an alternative view on deposit insurance here).
'We avoid detailed onsite inspections of financial institutions'
Meanwhile, Fiennes said that requiring directors to attest that their financial institution has satisfactory risk management processes boosts the incentives for directors to run the business soundly.
"For the same reason, we avoid detailed onsite inspections of financial institutions. If institutions’ directors knew that the Reserve Bank would act as another line of defence, they have less incentive to ensure robust internal controls."
"The absence of detailed onsite checking is a defining feature of New Zealand’s regime compared with those in other comparable nations. As well as diluting self-discipline, an onsite programme carries significant costs for both industry and the taxpayer. We remain comfortable being an outlier in this regard," Fiennes said.
In contrast to the Reserve Bank, the Australian Prudential Regulation Authority makes onsite visits to New Zealand's four Australian owned banks as part of its supervision of Australian banks.
'No groundswell for change'
Fiennes also noted the visit of International Monetary Fund (IMF) officials to New Zealand as part of an assessment of this country's financial system and regulatory settings.
"External reviews do concentrate the mind, and the [IMF] FSAP [Financial System Assessment Programme] has been a factor in our critical re-examination of our framework. The IMF will communicate their findings and recommendations to us and the public late this year or early next year. But based on the internal re-examination we have just done, we think the overall New Zealand regulatory framework remains generally suitable, and indeed there seems to be no groundswell for change from industry or public stakeholders," said Fiennes.
58 Comments
Are you suggesting that in your opinion that "Depositors and policyholders will suffer losses"?
It seems to me that the RBNZ are just about guaranteeing that will happen with their OBR system.
The only hope under OBR is that when a bank fails that it isn't the bank that has your deposit(s). Given the small nature of NZ's banking system the failure of one bank is likely to cause the failure of the whole financial structure (and then be reacted to with a post OBR emergency scheme). The whole NZ financial system is particularly fragile with the major reliance on four foreign owned banks who have no RBNZ requirement to provide any support at all to their NZ branches.
If OBR is invoked it will be a major RBNZ failure due to their light regulation regime, and inattention to their duty of care for NZ depositors.
Hopefully it will be a small bank that fails first. But when it happens, doesn't that bank that fails become government guaranteed? If so, then that leaves all the other banks open to a run on their accounts, as people shift their money to the bank with the government guarantee. Is this what could happen? It does appear that people are taking their money out of banks and putting it into property and equities, as the sharemarket is at an all-time high.
So, our RB knows better than all the other OECD countries that have deposit insurance. Why are these countries ignoring the'solid international evidence' which apparently shows that we are better without it?
What makes our RB so much smarter than all the others? Wheeler has become ever less impressive and perhaps we need a complete clear out. On the evidence so far, I wouldn't let this lot run the local dairy, never mind the RB.
Linklater, are you saying that other govt's and central banks know what they're doing, I can't see any of them that have cast themselves in glory this past 8-10 years, and they still don't seem to have learnt. Are you suggesting we automatically follow these guys even when "solid international evidence" suggest otherwise - more comfort in the herd for you ?
No one is suggesting we follow their monetary policy. It is abundantly clear to everyone, that no central bank anywhere knows anything about running an economy.
What people are saying is that some sort of guarantee should be offered for deposits.
It CGA101, if you can't fix or remedy the problem then at least give me my money back :-)
interesting to read just a little bit of the history of Mr Fiennes and his role with South Canterbury Finance under the deposit guarantee scheme which was so poorly regulated and overseen by RBNZ and Treasury.
http://www.nbr.co.nz/article/scf-complexity-beggars-belief-reserve-bank…
perhaps this explains his approach and current refusal to consider protection of bank depositors and his reluctance to pursue meaningful regulation of banks. After all, the depositors will cover for any RBNZ inaction.
See, this is the big issue; everyone wants a free lunch. You all want the reward, but don't want any commensurate risk.
Depositor insurance is not the role of a Central Bank. The role of a Central Bank is to impartially manage the money supply and regulate financial institutions. It is not the role of the RBNZ to tell the government how to spend its money, which is what depositor 'insurance' is.
The RBNZ are highlighting the intrinsic risk of depositing (investing) with a banking institution. For some reason their attempt to better align the interests of market players and consumers is just absurd to some serial whingers.
".In supporting market discipline, we do not guarantee that no financial institution will fail, and we do not have explicit customer protection. While the New Zealand financial system is sound, history tells us that banks, NBDTs and insurers can, and do, fail. Consequently, depositors and policyholders - both wholesale and retail - may suffer losses."
The message is clear: buy houses cos you can't trust the banks..
It would appear that deposit insurance is something that NZers want. The rest of the OECD has it. We don't have it because of the view of a few treasury boffins. The idea that some dashboard to assist public decision making is breathtakeningly stupid. At the end of the day there are many in society that do not have any financial literacy and rely on banks to preserve their futures. The Canterbury earthquake showed how govt insurances can help overcome disasters. Surely the logic is exactly the same if a bank fails?
the Australian government underwrites their scheme, the good news not to hard to open an Australian bank account and transfer funds.
what is he going to do if things go bad and the money starts flowing across the ditch like a waterfall
http://www.guaranteescheme.gov.au/qa/deposits.html
That's the thing about "deposit insurance" - it isn't real insurance. No real insurance company ever provides that sort of cover because it is completely un-commercial.
Bailouts of depositors are only ever provided by the taxpayer, wherever "deposit insurance" exists.
"Deposit insurance" is just one big moral hazard. It exists as a political expediency which is why its not real insurance.
At least in New Zealand the RBNZ is quite upfront about the risks you take when you give a bank your money in return for a promise to be repaid in the future. When you hand it over, it is no longer "your money", only a claim for it to come back. Despite what you may assume, it is a choice. Giving money to others (including banks) involves risk. Depositors need to accept that. Expecting someone else to front up with make-good compensation just because a risk crystalised is in-of-itself a selfish expectation. And probably not a reasonable one.
So what you are saying is that if a Bank fails tough it will fall back on Joe Public. Time to get real and business like, face up to the risk, lets have Insurance on deposit, it is a business decision. BUT the powers at be just do not what to make the hard call. Scared of a Credit Down grade.
Disagree. Deposit "insurance" is the easy way out. A political choice to keep votes and avoid the hard issues. OBR is a much braver, more principled choice, even though it won't be popular. But I do agree, the real test of OBR will be when things get hard. Not confident the politicians wouldn't buckle then as the crowd get loud.
Risk doesn't disappear with deposit 'insurance', just who pays gets transferred.
What planet are you on? Wages and Salaries are paid into banks NOT by choice these days. A "deposit" is not just some kind of "investment" to be abused, stolen and misused by a bank OR government institution to save a corrupt and greedy debt creating industry!
Mark my words, any government reserve bank trying this crap on will face a severe public response.
They either do the RIGHT thing and back people and their hard earned savings up or we ALL turn our backs the very next day on ever handing over another dollar to some a-hole to tax.
That...... simple.
"Bailouts of depositors ... by taxpayers" is a usual disclaimer by those who support the unique RBNZ OBR approach. This need not be the case - e.g. the FDIC insurance for USA bank deposits has not cost the US taxpayer anything in 80+ years of banking failures - preventing any banking runs since the heart of the Great Depression. Likewise Australia (I believe) did not have any taxpayer intervention - but of course the banking regulators in Australia have a much more stringent set of regulations than is apparent in NZ. To believe, as does the RBNZ, that the banks here will self-regulate is naive.
The true moral hazard introduced by the RBNZ is relieving the 4 main foreign owned banks from having to properly manage the NZ deposits lodged with them. Currently it is a one way street with funds (current profits) going overseas to never be available in a banking difficulty here - NZ depositors have been pre-positioned at the bottom of the financial cliff.
It is not selfish to expect the RBNZ to provide prudent oversight - and to not rely on banking self regulation. Even Alan Greenspan eventually admitted the huge mistake made by the US Federal Reserve in this regard - but fortunately for him and the US financial system there were absolutely no depositors who lost funds during the many banking failures there during the GFC.
NZ is all the more vulnerable with the current RBNZ light handed approach - in reality having a fragile banking system reliant mainly on overseas banking parents who don't have the obligation to support their branches in NZ.
We accept that Bank deposits are "Safe" but they are unsecured loans to a Bank but a Mortgage is a secured loan by the Bank so even with an offset account a Bank failure would leave you with a loss on the deposit but remain indebted. This would be fine if depositors were able to assess the risk especially when Banks issue covered Bonds against the best mortgages and possibly have indulged in derivatives were the risk is unkown. Deutsch Bank is reputed to have exposure to derivatives exceeding twice Germany's GDP and no doubt other german Banks will have similar exposures so a failure will presumably have a domino effect which may explain why central Banks continue QE .A Govt Gtee is therefore nothing more than a promise to raise taxes to cover depositors losses. Attestation is all very well but what sanction is there for mis attestation - perhaps Jail and forfeiture of all assets of those involved would act as a deterrent. The colossal global debt will cause unpredictable & chaotic times ahead.
The OBR policy is staggeringly stupid in that it is highly likely to precipate the very event it is intended to prevent.
If OBR is triggered at any one of the major NZ banks it will be a huge news story and likely trigger a bank run at all other banks as depositors rush for the exits.
Seems that Mr Fiennes is just one more in a long line of bankers who throw all the variable's into the equation except human nature.
That is a political choice, and not one that should be made by a central bank. While it is not one I agree with, if voters want to pay taxes so that some bank depositors are insulated from a risk, that is a valid public policy position to reassign tax revenues to achieve that. It is just not something the central bank should be involved in. Their job is to make sure depositors know their actual risks. The mitigation the central bank should do is via financial stability regulation.
The higher order consequence of the OBR is that it will just make the rush for the door more extreme...even if it is "only a tremor" , in regards to any noise of a bank failure..
ie. the OBR undermines the very thing u say , and it will do that at the worst time.... The mitigation the central bank should do is via financial stability regulation.
As the government and IRD practically make bank accounts compolsury for the purposes of audits then they have a resposibility to make the banking system for depositors as sound as possible. Any obligation to borrowers should be treated as minor as taking on debt is voluntary
OBR is draconian and we are now the only country in the OECD with it. Australian depositors in the "big 4" Aussie banks are protected by $250,000 deposit guarantee insurance per depositor. Meanwhile depositors in the Aussie banks operating in NZ have no such protection. Win win for Aussie depositors while NZ depositors are thrown to the wolves. It seems that many savers are unaware of OBR and its implications. Surely the Reserve Bank and Trading Banks have an obligation to inform the public of the risks associated with depositing their hard earned savings in a bank, which many of them regard as a secure place to invest.
My view is that there is some sort of implicit deposit insurance provided by the taxpayer. Air NZ is a very good example of the government's willingness to support large businesses deemed to be structurally and/or representatively important to our country. Banks certainty fall into that category, especially structurally.
If the Big 4 fail, the taxpayer cannot afford to bail them out. It's likely we couldn't bailout even one of them, once derivatives liabilities were priced and underlying securities (e.g. housing) revalued.
NZ is too small, too poor and our banks too large and too risk laden. Not to mention APRA legislatively mandating capital repatriation to Australia and outlawing any financial support to struggling NZ subsidiaries ... which are of course going to struggle due to capital repatriation. Death by design.
This is why we have OBR.
"for a small annual premium"
Cute.
I'm no actuary, but I would say the level of risk in the market at the moment would conclusively discount any notion of the premiums being "small"...
As has been mentioned in this thread, I just can't see how you could make such a scheme viable in the long run. There is just too much systematic risk.
You might think it sounds a cute" idea, so how come all of the countries in the OECD do not think that way and offer a form of bank deposit insurance. NZ is out of step here. Even the OECD in 2013 urged the NZ Government to offer a bank deposit insurance, but this has fallen on deaf ears. Why should depositors be expected to potentially help bail out a failing bank when they are making $billions.
So you miss the whole point, then?
The RBNZ is arguing that depositor insurance facilitates more risk/moral hazard in the market. They are effectively saying that Bank's need to adequately account for their risk and ensure prudential management to survive.
To say NZ is out of step is wrong - unless of course you believe that bank bailouts are perfectly fine and should in fact be incentivised in the market.
It really is simple; if you put your money into a banking institution, you accept the risks associated. Why should you be protected for incentivising the institution to undertake unsustainable practices and require bailouts?
OBR is designed to be a one-time deal. One haircut. The bank is recapitalised and reopened once (if) stable. Will the government implicitly or explicitly guarantee remaining unhaircut deposits in an OBR'd bank? Unknown. Regardless, the now stabilised bank is more attractive to new depositors than those still laden with toxic liabilities in opaque structures and still potentially subject to a future haircut. Think guaranteed deposits in finance companies but on a much larger scale.
This is why OBR on a Big 4 bank is likely to be an industry wide event. The RB will need to push the button on all large banks (and not just Big 4) in order to prevent the disorder, instability and panic of bank runs. If they OBR just one Big 4 bank, the capital flight will likely sink the rest anyway.
"...In supporting market discipline, we do not guarantee that no financial institution will fail, and we do not have explicit customer protection. While the New Zealand financial system is sound, history tells us that banks, NBDTs and insurers can, and do, fail. Consequently, depositors and policyholders - both wholesale and retail - may suffer losses. Our mandate is soundness and efficiency of the financial system as a whole. The growth and demise of individual institutions in accordance with the competence of their management and demand for their services are a natural part of a competitive and efficient economy," Fiennes said.
Isn't it time the RBNZ stopped officially enabling the banks to cut the returns to those that are deemed unsecured bank creditors and most at risk?
The central banks' banker is well versed in the stupidity of the RBNZ's futile attempts to influence an arbitrary, but narrow definition of inflation, which by default demands risky, significant transfers of wealth from one cohort of society to benefit another. Who authorised RBNZ officers to pick winners?
A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening. Borio page 12 of 38.
And:
More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability, when combined with some of the previous elements. Working with better representations of monetary economies should help cast further light on the aggregate and sectoral distortions that arise in the real economy when credit creation becomes unanchored, poorly pinned down by loose perceptions of value and risks. Borio Page 17 of 38
If there was an OBR there is nothing to stop people from suing the RBNZ for not undertaking the job properly........a bit like Councils footing a portion of the leaky buildings when they were deemed responsible for oversight of building activity..........
The fact is it is the RBNZ who won't ensure security of depositors funds.........the banking system allows those deposits to be leveraged up with debt creation........the banks are then allowed to sell the mortgage security instrument that is produced through the leveraging process........why not stop the selling off of all mortgage security instruments??? The whole mortgage instrument formation and ownership needs to come out into the open.......it is like a deep dark secret in the world of banking......
If the RBNZ was truly into risk management then it would ensure that smaller banks were able to set up here without the exorbitant costs involved with bank registration and regulation.......the spreading out of the banking system across multiple unrelated entities is paramount to financial stability.........it is common sense to acknowledge the differences in impacts between a small entity failing vs large entity failing......the current attitude is one of fewer to watch over is easier.......and while on the surface that might seem plausible it actually shows that the systems of monitoring are not suitable and that the RBNZ does not have the necessary skill or ability to do the job required.........have they ever informed the Minister on these issues?
If there is a bank failure I am strongly of the view that legal action against the RBNZ would be the most suitable action to take in regards to obtaining any deposits back in full........so in effect the tax payer would be on the hook anyway!! There is also the issue of whether the regulation and policies imposed by the RBNZ would stand scrutiny in the courts under the constitutional rights of the people and Parliament is meant to uphold the constitutional framework as provided in the 1688 Bill of Rights.......NZ doesn't have the required 2 houses so in effect the Reserve Bank Act should not exist and has no right to exist!! So what does that make the people running the show???
I am very concerned at the antics of the RBNZ they are not coming clean on the effects of their policies, they whinge about house prices increasing and the risks to financial stability yet every policy they implement is driving investment into housing!! There narrow vision of what causes financial instability is astounding........there seems to be a clear lack of business acumen inside that place which is actually more scary than any bank failure........
the reserve bank decided 10 years ago that they wanted to take the route of all eggs in one basket, when they decided to wipe their hands of the finance company sector. It was apparent at the time that it suited them to concentrate all the risk up the chain to a number of very large banks. probably to simplify oversight from the rbnz perspective, and reduce compliance. in taking this route they singlehandedly removed competition, and diversification. what I find interesting is that a consumer lender/vehicle lender will probably turn over there book every 12-24 months, in other words they are cashflow lenders. banks on the other hand are in the main asset lenders. I would dearly love to know how often they turn over there books? Suspect (taking out refinancing) its 5+, or 10+ years. Banks tend to lend very long, and borrow short. They have a maturity mismatch, so rely on refinancing and the rbnz as a backstop should the shite hit the fan. Frankly the rbnz should be billing the banks for this "uncommitted facility" and creaming off the back of dumb bank management.
If RBNZ are serious about financial stability why are they cutting interest rates during a property bubble?
The notion that this is in the name of inflation targetting is laughable as they join the cohort of CBs racing to the bottom.
One question the RBNZ could ask the banks is why they have over 50% of their assets (loans) collateralised by residential real estate. Did they skip the chapter called "diversification"?
While RBNZ are cutting rates under the guise of a' high' exchange rate and inflation targets , they are actually now more concerned about a very real possibility of a housing crash causing financial instability .Odd if we have a housing crash , we will get the lower exchange rate in spades and a pleasant surge in inflation .
not the banks fault - the blame rest fairly and squarely on the reserve bank who dictate risk weightings - which favour residential mortgages. Banks need to hold 3 times as much capital for a commercial loan as opposed to a mortgage.
3.1.5 Residential mortgages (owner occupied and investment) LVR
3.1.5.1 Secured by 1st mortgage over land & buildings <=70% 35%
3.1.4 Commercial (typically asset finance to SME's) LVR
3.1.4.1 Secured by a PPSR charge over "qualifying moveable machinery" <=70% 100%
"We are not a captured regulator, honest."
How does the RBNZ free itself from its effective captivity imposed by the $418,853,000,000 debt load it has encouraged? It can't increase the 2% bank reserves held against mortgages (25% risk weighting on 8%), or put interest rates up, without collapsing the bubble. What to do?
Keep modulating interest rates to a level that Kiwis can afford and pretending all is well, and hope something turns up. Methinks their theories resemble a cargo cult. If only we believe in them then everything will turn out well.
They are "captured" by their paradigm.... their model of the world.
Sad things is.... the "cargo cult" was exposed with the GFC as an unsustainable debt burden.
AND... we...NZ... never bothered to learn from it....
We simply dance behind, in the Footsteps of, those that have gone before...
My guess is that when our turn comes, we might well follow in the footsteps of the Southern European states ...who are, pretty much, still in a depression... ( after all we are a chronic debtor Nation with so..so productivity, but with great renewable natural resources )
As individuals .... we have to somehow come thru all this unscathed.... is this regard, knowledge and understanding are a big deal.
Hopefully it won't be as bad as Southern Europe, who had effectively borrowed in a foreign currency (DeutschMarks masquearading as "Euros").
It is a worry though, presumably their comes a point where building peaks just as migration to Aussie gets going again. The currency will tumble and the RBNZ may need to vacuum up some bad debts.
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