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Greater powers for the Reserve Bank to monitor banks and hold directors and executives to account are long overdue and needed to bring New Zealand into line with the rest of the world, legal experts say.
Finance minister Grant Robertson yesterday announced a raft of decisions steming from the second phase of the review of the Reserve Bank Act.
They include giving the RBNZ the power to carry out on-site inspections allowing the banking regulator to carry out independent testing and verification of claims about compliance which have previously been left up to bank directors to attest to.
In a joint statement Helen Dervan, a senior lecturer in law at AUT University and Simon Jensen, a financial sector regulation lawyer at Buddle Findlay, said the provision of greater powers was expected and necessary given New Zealand’s ties to international markets and increasing use of complex financial products.
“New Zealand’s regulatory philosophy of light-handed supervision with no on-site inspections, no Reserve Bank verification of bank disclosure statements and no depositor protection is out of step with international practice and reform is long overdue.
Many financially advanced countries reformed their regulatory regimes after the GFC.
Dervan and Jensen said there had been long-standing criticism of New Zealand’s “hand-off” approach, most recently by the International Monetary Fund in 2017.
“These reforms will mean that New Zealand will be more aligned with international norms and, hopefully, better prepared for another financial crisis.”
Some of the Reserve Bank’s most prominent critics have also welcomed the government’s decisions to give the central bank’s board real governance powers and to introduce retail deposit insurance.
New Zealand is the only OECD country without some form of deposit protection.
Massey University banking professor David Tripe has long called for a deposit insurance scheme because successive changes reducing the amount of public disclosure banks had to make reduced the ability for independent observers to make judgements on a bank’s safety and soundness.
“Information disclosure hasn’t been working very well. It became pretty clear when the GFC was bursting out that we needed deposit insurance and that we needed to have it in advance and not create it on the fly,” Tripe said.
The government’s hand was forced to introduce a temporary deposit scheme in October 2008 after Australia introduced such an initiative as the GFC set in. That temporary scheme expired at the end of 2011.
Now, the government has decided to introduce deposit insurance of $50,000 per institution, although it plans further consultation before finalising the details of how it would operate.
Although the government opted for the top end of the $30,000 to $50,000 range it consulted on, the amount is just a fifth of the A$250,000 per deposit scheme Australia operates.
“It’s an improvement on $30,000, but it’s still not enough,” Tripe said.
Dervan and Simon Jensen said it was disappointing that it was limited to $50k.
“Based on proper comparisons (with the UK, Australia, Canada and US) it should be around $150,000 and, as a consequence, it is at serious risk of having to be increased at the worst possible time – when there is a failure or crisis (which is what the UK had to do).”
However, submissions from two former Reserve Bank governors – Grant Spencer and Graeme Wheeler – said any government guarantee should be “de-minimus” and suggested $20,000.
A spokesman for Finance Minister Grant Robertson said officials had looked at other government deposit guarantee schemes around the world and that they generally covered about 90 per cent of each country’s depositors and that in New Zealand, $50,000 will likely fully cover more than 90 per cent of depositors.
The Reserve Bank has long-favoured a process known as ‘open bank resolution’ which would mean forcing all the mums, dads and their kids with bank deposits to take a financial ‘haircut’ to help shore up a failing bank.
The reaction to the GFC highlighted how unlikely it is that any government would allow that to happen.
Don Brash, the first governor under the current Reserve Bank Act 1989, told BusinessDesk he has changed his mind and now supports deposit insurance “for what are essentially political reasons – not party political reasons. In the event of a bank collapse, my preference is OBR but I don’t think OBR would work with no deposit insurance,” he told BusinessDesk. Brash is also a former National Party leader.
He noted a cabinet minister, David Caygill, had thought deposit insurance was unnecessary because, for the vast majority of New Zealanders, their house or car was their biggest asset, not a bank deposit.
“Though $50,000 by international standards is quite a low figure, I personally think it’s fully adequate.”
Among his questions yet to be answered are which institutions will be covered – Robertson’s media release said the insurance would be “per institution,” not “per bank,” and whether the government will charge for the insurance.
Brash also supports the governance changes.
Currently, the Reserve Bank’s board acts as a review body, not as a governance board. The governor used to have sole decision-making power over monetary policy, but that changed earlier this year when a monetary policy committee was introduced.
Similarly, the board will have oversight of everything at the central bank apart from monetary policy, replacing the governor’s sole decision-making power in his prudential regulatory role – Adrian Orr is the current governor.
“I think most people would regard that as a positive move, particularly in light of recent developments,” Brash said.
“Rightly or wrongly, the public impression is that the governor decided to double bank capital and then set about finding a way to justify it,” he said.
Finance Minister Grant Robertson. Photo / File
“A board would presumably require the bank staff to justify banking decisions in a robust way.”
Earlier this month, Orr confirmed that the four major banks would have to near double minimum equity capital from 8.5 per cent of risk-weighted assets currently to 16 per cent, and the smaller banks to 14 per cent.
However, the banks will be given seven years, rather than the originally proposed five, to increase their capital and 2.5 per cent of equity capital can be satisfied with preference shares, a significantly cheaper form of capital than pure equity.
Brash is currently chair of the NZ subsidiary of Industrial & Commercial Bank of China, which had equity of 13.7 per cent of risk-weighted assets at Sept. 30 and total capital of 16.9 per cent.
Tripe also cautiously approves of the governance change but clearly will reserve final judgement until he sees new arrangements in action.
“They would have a bit more in the way of a substantive function to perform. It’s a matter of whether they actually do it or rubber stamp what comes out of the corner office.”
The Reserve Bank’s board has never publicly criticised any governor.
New Zealand Initiative chair Roger Partridge said the governance and accountability reforms are “commendable” and will resolve what he regards as “one of the most troubling public sector governance problems.”
NZ Initiative published a report called ‘Who Guards the Guards? Regulatory Governance in New Zealand’ in 2018 that was highly critical of the lack of oversight of Reserve Bank governors.
“The Reserve bank governor currently has unprecedented power” and “our research found the Reserve Bank commanded neither the respect nor the confidence of the financial institutions it is tasked with regulating,” Partridge said.
His organisation had wanted the central bank to have a board governance model and is “extremely pleased the government has adopted this recommendation,” he said.
But he still takes issue with the role of external monitor shifting from the board to the Treasury, saying he would prefer this monitoring function to be transferred to a new independent specialist monitoring agency.
Australia’s recent royal commission into financial services made a similar recommendation.
Dervan and Jensen said it was disappointing the RBNZ board would be the supervisor of prudential policy.
“In our view, a governance board is not the optimal form of decision-making body. The complexity of prudential regulation and supervision requires a high level of expertise and a multi-disciplinary approach.
“A modified version of the UK model, in which there are specialist statutory committees covering macroprudential and microprudential aspects of regulation, would be preferable.
“This sort of structure would better ensure that the requisite skills are present, provide greater challenge to institutional thinking and provide more protection against “groupthink”, a defective form of decision-making.”
– Additional reporting Tamsyn Parker.