The Reserve Bank’s next Financial Stability Report is due out next week.
As a reminder of what Parliament requires from the Bank in these documents:
165A Financial stability reports
(1) The Bank must, not less than twice in every calendar year,—
- (a) deliver a financial stability report to the Minister; and
- (b) publish the report on an Internet site maintained by, or on behalf of, the Bank.
(2) A financial stability report must—
- (a) report on the soundness and efficiency of the financial system and other matters associated with the Bank’s statutory prudential purposes; and
- (b) contain the information necessary to allow an assessment to be made of the activities undertaken by the Bank to achieve its statutory prudential purposes under this Act and any other enactment.
Financial stability reports date back to before this legislation was passed in 2008. Such reports can contain any material, descriptive or analytical, that the Bank judges appropriate and interesting, but each report must meet these statutory requirements. And for some years, I’ve thought the reports were deficient in respect of 2(b) above (and have made the point internally).
Plenty of people produce descriptive material on New Zealand, but these documents are primarily intended to be accountability documents – allowing citizens, investors, Parliament, the Bank’s Board and the Minister of Finance to evaluate the Bank’s extensive and increasingly intrusive activities supervising banks, non-banks, and insurance companies. Thus the Act requires that the FSRs “contain the information necessary to allow an assessment to be made of the activities undertaken by the Bank to achieve its statutory prudential purposes”.
In fairness, this is not an easy test to meet, but it is not being met now (nor was it in earlier years). FSRs tend to include a lot of descriptive material and sometimes some interesting analytical perspectives on that data, but when they get to the Bank’s policy activities – the making and implementing of supervisory policy – the reports tend to be rather light. There is typically a focus on new initiatives but very little material attempting to evaluate the impact, good or ill, of the Bank’s existing regulatory measures. Of course, the Bank can’t cover everything in every report, but perhaps it could consider in each FSR taking one aspect of prudential regulatory policy and providing a range of perspectives to enable readers to assess and evaluate what the Bank is doing. Since it is difficult to assess oneself objectively, or even present information in a balanced and open way, it might be wise to consider a panel of external advisers to review and critique such material. A good place to start might be an easy and self-contained area, like the fit and proper person requirements. Perhaps more pressingly, what material might enable us to evaluate and assess the LVR restrictions against the statutory purposes for the Bank’s prudential powers? Are they actually enhancing financial system soundness, and at what cost to efficiency of the system?
No doubt most focus next week will be on the Bank’s perspectives on the housing market, and the possibility of yet more regulatory interventions. We might hope for some hard-headed, but open-minded, analysis of the nature and scale of the actual financial stability risks New Zealand is (or is not) facing.
I was reading this afternoon the IMF’s latest Regional Economic Outlook on Asia and the Pacific. With these sorts of documents, the text is often less interesting than a good chart or table. I was interested in this one, a “heat map” of risks in a number of Asia-Pacific economies. It is just one lens on the issues, and isn’t that easy to read – New Zealand is the 9th column from left in each of the three variables. Green and blue scores suggest rather little risk. Reading down the table we move from 2008 to the present.
So, for what it’s worth, the IMF doesn’t seem to see big financial stability risks in New Zealand – even the housing score is pretty unthreatening. In its last FSR, the Reserve Bank reported that it saw four big risks. I thought they were all well-overstated, but will be interested to see how they make their case next week.
Parliament’s Finance and Expenditure Committee typically hears from the Governor on the FSR a few hours after the release. No doubt the timing is good for attracting media coverage, but I’m not sure it is conducive to doing the scrutiny and accountability job particularly well. FSRs are not short or easy documents, and it might be preferable if MPs were to take a few days to read the report in more depth, read the commentaries and take advice on possible lines of questioning. At times like the present, I’m sure both market commentators and the media would still be keenly interested in what MPs had to ask of the Governor, and how he replies.