By Gareth Vaughan
Coming towards the end of this unprecedented year, last week's Institute of Finance Professionals New Zealand (INFINZ) virtual conference was illuminating in terms of the light it shed on the current relationship between the country's big banks and their key regulator.
Those following the conference heard from Reserve Bank (RBNZ) Governor Adrian Orr, plus the CEOs of three of the country's big four banks and the Chairman of the other. Orr came across as frustrated and grumpy, and the bank bosses as bolshie. That's quite the cocktail ahead of key issues set to come to a head in coming weeks. When these attitudes are on public display, one does wonder just what is going on behind the scenes.
Orr expressed concerns about the over heating housing market, noting the potential for RBNZ action, and suggesting rather than reining themselves in "the [banking] industry always just wants to have it done to them."
Orr, who appeared alongside Financial Markets Authority CEO Rob Everett, was followed by a panel featuring ASB CEO Vittoria Shortt, BNZ CEO Angela Mentis, Westpac NZ CEO David McLean, and ANZ NZ Chairman and former Prime Minister John Key.
Key, in particular, had a lot to say. He was concerned about asset bubbles and zombie companies, increased bank capital requirements, and led staunch opposition from the four bank bosses to the possibility of the RBNZ taking the Official Cash Rate (OCR) negative. Key stopped short of saying, Henry II style, "who will rid me of this turbulent Reserve Bank Governor?" But he certainly talked his own book, bluntly saying the cost to banks of higher capital requirements will be passed onto rural borrowers.
Key appeared to have forgotten that the Government he led passed the Non-bank Deposit Takers Act, meaning this sector is now prudentially regulated like banks by the RBNZ. Key suggested there was a danger of the non-bank deposit sector "really growing," and starting "advertising on the internet and Sunday papers and everything else, [offering] higher interest rates under the illusion that they look like a bank when they're really mezzanine finance providers for property developers."
And this was hot on the heels of Orr saying bank executives ought to "think beyond your nose" when it comes to negative interest rates, and wondering if negative rates don't appeal to bank executives because they might impact their bonuses.
All this, remember, is against the backdrop of COVID-19 and a year featuring huge intervention in and support for the economy from the Government and RBNZ. Given their fingers are in almost all the economy's pies, this has flowed directly through to banks. For example, through mortgage deferrals, the wage subsidy scheme, cutting the OCR to a record low of 0.25%, removing restrictions on high loan-to-value ratio (LVRs) home loans, and the large scale asset purchase programme or quantitative easing the Reserve Bank is undertaking. This has all been designed to keep the lights on in the economy and credit/debt flowing against the backdrop of COVID-19 related restrictions, public anxiety, and the grim international scene.
After praise for both the Government and RBNZ from senior bankers for quick and decisive action earlier in the year, the sheen appears to be wearing off the big four banks' views where the RBNZ is concerned. And this ahead of key decisions due in November likely to be centred around the OCR review and Monetary Policy Statement of November 11, and the Financial Stability Report on November 25. Note ahead of those two events ANZ, BNZ and Westpac are all due to release annual financial results, giving them prime opportunities to deliver their key messages via the media.
Detail is expected next month on if, when and how the RBNZ may proceed with a funding for lending programme that would offer cheap loans directly to banks for them to on-loan to borrowers. Any steer on taking the OCR negative will also be eagerly anticipated. Last Friday's weak inflation data bolstered the case for more stimulus to help the RBNZ try to meet its inflation target. But what would this mean for the red hot housing market?
Meanwhile, Key led calls from the bank bosses for the RBNZ to again delay implementing its increases to banks' regulatory capital requirements. Already delayed a year, these are currently set for implementation over seven years from July 2021. However, the RBNZ position on capital appears as staunch as ever, given the regulator used the release of its recent bank stress test results to reiterate its case for bank capital strong enough to withstand a one-in-200-year event.
There should also be news next month on whether the RBNZ's April ban on banks paying dividends and redeeming bond issues "until the economic outlook has sufficiently recovered,” will be relaxed or continued. And with the RBNZ Act review rumbling on and the housing market hot, Orr also again raised the possibility of adding a debt-to-income ratio tool to the regulator's macro-prudential toolkit.
Thus there are plenty of key issues coming to a head, and coming to a head soon. One imagines Finance Minister Grant Robertson didn't have too much time basking in the glow of Labour's stunning election victory before having his ear bent by vocal bankers and/or bank regulators.
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48 Comments
Cut them loose Adrian.
Let any taxpayer open a Call Account with you and let those who want to use the retail banks as an alternative for their savings do so at whatever rates the market determines. Let lending rates and risk be set accordingly. Let the banks come to you if they need liquidity and borrow on your price and application terms.
Drop your Call Account interests payable rate to minus 0.25 - or whatever you want - if you want to make the retail banks look a better option. But either cut them loose - or regulate them fully, and properly.
(NB: You'll have done all the exploratory work on this already. All it now takes is for you to decide. And an accommodating half-way house isn't going to work. Because that's what you have today, and just look at it)
Yip - the banking sector appears to be half pregnant right now. You're not going to get the baby but you sure have to put up with the pains.
Wonder how long this will go on for before we see significant change.
I personally don't understand how retail banks can continue to be considered private entities when another entity carries all of their risk.
It is not understandable that the private banks, having been gifted the power of money creation for extreme individual profit whilst completely discounting future risk, expect that public socialism is applied . We need new thinking, as no `central` bank appears capable of any rational analysis of the damage done, nor has any intention to fix. Economic models with no conception of debt toxicity are useless in a sea of uncertainty for the public, who they serve?
Hey bw mate we sold all the banks to Australia, we don't own them and its a wonder we have any control over them at all, Oh wait they are not doing what they are told ? thats a big surprise, maybe they are trying to run a business and not go down the toilet by taking big risks in the current climate that even a school kid doing his first economics class can figure out. If you don't like it, put your money in a Kiwi bank or stuff it in your mattress.
What did they expect? The private banks are just that; PRIVATE. As has been demonstrated many times over they are only interested in their profits. Superficially they put the shareholders first, but in reality it is their HUGE pay packets and bonus's that the managers get.
And when will the Government and RBNZ understand that a 'hands off' atitude and approach just doesn't work. The economy must be regulated, and the banks are really just business's operating within the economy, and worse, they type of business and size means they can manipulate and control the economy. They MUST be regulated!
PS all the bank CEOs want themselves to be regulated, because when the economy collapses because of their actions, they will be able to point the finger at the government and not admit they did it to themselves. The problem is they take all of us with them!
Yeah but the thing is they no longer appear to be private. RBNZ is carrying their risk. RBNZ is going out and telling them to 'get on with it' and lend.
Each month I'm becoming more convinced that the role of retail banks is becoming more and more marginal. RBNZ may as well just lend themselves.
There should also be news next month on whether the RBNZ's April ban on banks paying dividends and redeeming bond issues "until the economic outlook has sufficiently recovered,” will be relaxed or continued
The scale of economic recovery or lack thereof with respect to stability of NZ's financial stability won't be clear until the mortgage deferral period ends in March 2021.
Banks would be aching to pay out earnings from the recent housing frenzy to their shareholders, leaving the financial mess that might follow for deposit holders, borrowers and taxpayer to sort out.
Funny how Key is concerned about asset bubbles now, but wasn't it only a few years ago he and English were saying having the worlds most expensive houses was a sign of success? Which one is it Sir John? A housing bubble is worthy of celebration if you're a politician, or now a seriously concerning risk to the economy and the banking sector if you're a chairman of the most at risk bank?
One day I'm with it for cheap votes as PM and next I'm against it because my bank is at risk.
If you want a real chuckle, have a read of what (Sir) John Key was saying in 2007 when he was trying to become PM!
https://www.nzpif.org.nz/news/view/53038
It wasn’t so long ago, in the 1990s, in fact, that New Zealand had a high level of homeownership compared to other countries. Not so anymore. We now have what has been described as the second-worst housing affordability problem in the world.
Make no mistake; this problem has got worse in recent years...National will look for long-term solutions based on a sound understanding of the economic forces that have led to the contemporary low home-ownership rates....To put those stats into context, you need only look at what that means for a first-home buyer on the average wage buying a median-priced house. In 1999 it took just 42% of their average take-home pay to service their mortgage. It now takes around 81%. That’s after they’ve somehow managed to save up a 20% deposit in the first place. That is a crippling increase.
And in the last 13 years ....it's got worse. Far, far worse.
Key was worth voting for first up, given all of his rhetoric, but he let us down.....badly.
A pity this article and previous National Leader quotes weren't brought up by our mainstream media during the election, and got National to explain what they would do to fix it. They denied there was a housing crisis for 9 years, until they got voted out. Then it suddenly becomes a housing crisis again. The housing crisis IMO, is the number one problem the country faces at the moment, due to all the knock on effects from it.
I sure will if Adern near the end of 9 years in power tells us that $2million dollar homes in Auckland are a sign of success, then quits the job, sells her home to a foreign buyer, picks up a job as the chairman on a big Australiasian bank, then has the audacity to tell us that rising house prices are very dangerous and a bad thing to have.
Watch this space - circa 2025-2026. You can hold me to it if you like :-)
(don't disagree with you though - I think she is going to do a John Key - should we protest in the streets and start burning buildings?)
I have said it many times before, despite her woke veneer Ardern is a conservative country gal.
Doesn't have a transformational bone in her.
Wellington is full of those types. Regional hicks who come to the 'big smoke' with a whole lot of fake, woke bravado and second rate degrees.
Lord Key looks like a sheepish high school student being dictated to in that image.
when it comes to negative interest rates, and wondering if negative rates don't appeal to bank executives because they might impact their bonuses.
What a dreadul thing to have to point out.
Ezy, its beyond my pay grade to say what the exact mechanisms are that will "sort it out" but I do know they don't include empty words and hugs, or the likes of shared equity schemes which would only serve to bid prices even higher.
There are some smart cookies on this forum that could detail the required medicine, just in case Jacinda is reading.
"Last Friday's weak inflation data bolstered the case for more stimulus to help the RBNZ try to meet its inflation target." Really? Maybe in the high rate environment of RBNZ models. But if more stimulus in a low rates context doesn't trigger inflation & only boosts asset prices, doesn't it bolster the case for not adding more fuel to the fire?
It's rich that Key is saying this, & they're self-interested, but banks seldom say anything negative about the regulator in public. That is cause alone to take the issue itself seriously, irrespective perceptions about the actors. And its bizarre to expect private banks to lend 'sensibly' if settings encourage profligacy. They won't lend 'sensibly' if business just goes elsewhere. The guidelines must be set by RBNZ and Govt, that's their job, not banks.
Indeed. Risk weightings for asset classes, LVR, DTI and other levers yet to be invented (or re-invented), capital ratios etc etc are all within the RBNZ's regulatory space, if only they would use them. The real question is whether the Will (or, perhaps, the Vertebrae.....) exists.
Maybe next election, since we have done the flag - thought laser kiwi was a winner, and this time death and weed - who would have thought?, we can have a referendum to rename the `central` bank? I propose RBNFO. New Zealand has been very innovative electorally and in high inflation targeting (but can never go to deflation for the everyman), also this may apply globally. RBNFO, Reserve Bank for the New (neo perhaps if it trends well in focus groups, old is perhaps more true - but marketing) Feudal Overlords, of course other words may fit. I for one, wish and hope they think very carefully about world they are now creating on this pivot for our following generations, sometimes doing different is good.
1990's interesting, when savings became an unsecured loan to a bank, and the debt wrecking ball got Japan (who still have high tech and manufacturing).
Flip the telescope around though, what might happen in under 10 years?
Once upon a time, the inflation needle is ticking up fast.
There is a really nice caring government, who offers to SAVE you from these `evil` private bankers, ex govt in some part, who have got you into so much unmanageable debt and caused all the problems in the world by needless speculation enriching the top 0.x%, also not prudently offering debt.
Their obvious fix is an account at the `Central` bank, a new digital currency (bitcoin is good right so this must be), hooray! some of your unmanageable debts get wiped (relative to the rise in interest rates), and benefits for all! That's pretty nice.
Of course that new currency was trackable, can be selective (can't purchase assets with this bit), and can be expired (you have till 31 March), and your social credit score - well no more humorous/sarcastic/narrative questioning posts on interest if you want to spend it.
Of course you would need to start the story early, perhaps with a meeting that resulted in a "grumpy central bank governor and the bolshie bank bosses"...
This bankrupt future, one of many, happens very slowly, then all at once.
Well, I am no fan of those who run the big 4 NZ banks, but I am really disillusioned with the RBNZ under Orr. He spouts Maori values, yet constantly ignores them. He knows that moving to a negative OCR will just add fuel to the property fire but intends to do so anyway-he knows that his direct funding package to the banks will go mostly to the property market but intends to press on regardless. This is madness. It will just widen the growing inequality gap. he should go.
Not one taxpayer cent to a bank. Implement it now.. communicate it clearly... and when they all crash nationalise all of them and pass thru the negative interest rates to the owner occupiers and small business.. Hang the property investor on a barbed wire fence. They have held nz to ransome for too long. The economy will melt and the new nz will rise from the ashes...
Mr. Orr requested prudent measures such as DTI, torpedoed by Nat.. then passed by Lab. His tools is limited, we can understand how frustrated he is listening to Jacinda conviction of not touching CGT, Wealth tax, and try to address the housing issue through one factor only: 'Supply'.. so be it!, recently Orr also stating about the climate change cost, his clear view to us all is this. I've got limited time and bullets left to sort out something that govt. give plain excuse not to attend. So Kiwis? more lv4 lockdown? Major Tsunami/Earthquake? floods? coastal erosion? sea level rise? climate change? any other major shock? - rest assure what he will do with the current available economic tools.
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