Trying to rein in the banks
By Richard Harman (author)
The applause from New Zealand First for the Government’s banking changes announced yesterday showed what the political thinking was behind them.
They were designed as a populist move to reassure the electorate about the safety of their money.
That analysis would seem to certainly apply to the bank deposit guarantee scheme announced yesterday.
Only deposits up to a value of $30,000 will be covered though the Government argues that this would cover 90 per cent of the depositors (but not deposits by value) in New Zealand banks.
“This means the average Kiwi who has been scrimping and saving will have the confidence that their nest egg is safe should the worst happen," said NZ First Deputy Leader, Fletcher Tabuteau.
But whether other moves also announced will contribute to the stability of the banking system is a question still to be answered.
The Government was given a clear set of recommendations to strengthen the stability of the banking system by the International Monetary Fund in 2017.
Some of those were confirmed yesterday.
At the same time, the Government is proposing to trim the “one-man-band” power of the Reserve Bank Governor, Adrian Orr, when it comes to supervising banks.
It is being proposed that he report to a statutory governance board which will have supreme authority over all Bank activities except monetary policy which will remain the property of the Monetary Policy Committee.
Finance Minister Grant Robertson is also talking about introducing a New Zealand equivalent of the Australian Bank Executive Accountability system which holds individual bank executives to account.
That scheme has also set our requirements for bank executives' administration which include strengthened Board Remuneration Committee oversight and enhanced reporting and disclosure.
The Australians require that deposit-taking institutions must provide APRA with individual accountability statements “clearly outlining the specific senior executive responsibilities within the organisation.”
The Bank must adhere to explicit requirements on minimum deferred variable remuneration for those identified accountable persons.
“APRA has the power to disqualify an individual from being an accountable person where the individual has failed to meet his or her accountability obligations,” the APRA Information Paper on the BEA scheme says.
“If an ADI (bank) fails to meet its accountability obligations, APRA may apply to the Federal Court of Australia to seek the imposition of substantial civil penalties.”
But the question here will be whether the Reserve Bank has the skill set and the resources to manage such a regime.
Robertson implied yesterday that they would need to be provided with more resources.
“Quite clearly they have a significant role to play in ensuring for New Zealanders that the banking system is not only safe and sound, which it is, but that the behaviour of banks meets the standards that New Zealanders would have,” he said.
“I fully expect as part of that process that the Minister of Finance will be called upon to look at what is required.”
There has been questioning of the way the Bank has undertaken its prudential supervisory role of banks so far.
In 2017, the International Monetary Fund (IMF) in an assessment of the stability of the New Zealand financial system said the Reserve Bank approach to supervision relied on three pillars: self, market, and regulatory discipline.
“The authorities have strengthened regulatory discipline, but the three-pillar framework should be improved by adopting a more intensive approach to supervision," the IMF said.
“This would increase the ability of supervisors to be proactive to exercise regulatory discipline and obtain reliable information to enforce self- and market-discipline.
“The Reserve Bank is encouraged to issue enforceable supervisory standards on key risks, review the enforcement regime to promote preventive action, and initiate on-site programs targeted on areas of high risk.“
And a former chair of the BNZ and Director of the New Zealand Institute of Economic Research, Kerry McDonald, argued in a widely circulated paper last year that the Reserve Bank did not actively assure itself that our trading banks were safe and capable of withstanding financial shocks.
“New Zealand has an unfortunate history of weak and incompetent government regulation and oversight, of complacency and failing to hold people and organisations to account,” he said.
McDonald’s fundamental complaint was that the Reserve Bank simply asked questions of the trading banks rather than actively investigating their books.
“The present position is that the RBNZ does not know whether the banks which it has licensed to operate in New Zealand are abiding by the terms of their banking licences," he said.
"The banks are simply required to attest that they are, but there is no review, examination or audit process, which is naïve in the extreme!”
Those comments have been given added focus with the recent series of events involving the ANZ Bank.
Robertson seemed to suggest yesterday that there is a case for the Reserve Bank to take a tougher approach.
“That is the debate we now have to have,” he said.
"Is our regime strong enough, and that is both in terms of the level of supervision, the intensity of the supervision and what might be possible if something is found to be wanting.”
The IMF proposed that the Reserve Ban issue enforceable standards on key risks, governance, risk management, and controls to make its supervisory expectations more transparent and support supervisory preventive action
And they also proposed that the Bank review and extend the enforcement regime to promote preventive action and enhance sanctions powers.
And interestingly the IMF suggested that the reserve Bank conduct on-site testing within the banks to see whether they were complying with its prudential requirements.
Nothing has been finally decided – except the deposit guarantee and the Governance Board --- and there will now be a further round of consultation with the intention of announcing strengthened accountability standards early next year.