The Reserve Bank has been firing out on-the-record speeches this week. I discussed the Governor’s troubling effort here, and may come back to that again in the next few days. I probably won’t say much about the Assistant Governor’s lecture yesterday – except perhaps to draw attention to his claim that ‘there are times when the Bank will know more about the economic situation and outlook than does the public or market participants’. Really? I guess the last three years, when the Governor has consistently failed to get inflation near the 2 per cent target, and has had to dramatically and grudgingly reverse his own rather strident policy stance, hasn’t been one of those times.
Perhaps more interesting were the two releases late yesterday afternoon on the role of market discipline in the context of prudential regulation of banks (in particular). Toby Fiennes, the head of the Bank’s prudential supervision area delivered a speech to some of those he regulates headed “Regulation and the Importance of Market Discipline” , and an issue of the Bulletin by two of his staff headed “The importance of market discipline in the Reserve Bank’s prudential regime” was released. In both of yesterday’s releases there is a refreshing reaffirmation of the importance of market discipline – even if the actual direction of policy isn’t really that consistent with the rhetoric.
The Fiennes speech is a mix: in part a lecture on the Bank’s view of the importance of market discipline, and partly a report on the outcome of the Bank’s recent tidying up exercise, the so-called “regulatory stocktake”. I wrote about the results of that process here (and a mere four months after first requesting them I have recently had released to me around half of the submissions the Bank received on the stocktake consultation ) .
I wanted to touch on just two aspects of the stocktake material. I was one of several submitters who had made the case that all submissions on Reserve Bank consultative documents should be published (as is now common practice in other government agencies and parliamentary select committees). The Bank has always been very resistant to such openness. But in its release in December, there were encouraging signs
Our current approach is based on our understanding that respondents prefer to keep their submissions confidential. Prior feedback indicated that banks, in particular, were reticent to share cost information and the Reserve Bank is concerned that the publication of submissions would impact the quality and detail of the submission feedback. On the other hand we also recognise the importance of transparency in the policy-making process, so we will return to this issue and consult on a revised approach under which the default position would be that all submissions are published on our website (although submitters could ask to have any confidential information in submissions redacted).
Unfortunately, the discussion in last night’s speech – when Fiennes went out among the banks – was weaker than what they put out in December.
Some submitters suggested that we publish all written submissions on our public consultations. Our current approach is based on prior feedback, which indicated that respondents prefer to keep their submissions private on the grounds of commercial confidentiality. We will test this more rigorously with stakeholders. The alternative would be to publish all submissions by default unless submitters ask for them to be withheld or redacted.
Talk of a new default position of publication has disappeared. What I wrote in December seems even more apposite in light of last night’s comments
I think this statement tells one a lot about the extent to which the Reserve Bank sees its clients as primarily the institutions it regulates, rather than the public the institution exists for. I’m sure that banks would generally prefer to keep their submissions confidential, and it is precisely for that reason that their submissions, in particular, should be made public. It is too easy for a cosy relationship to develop between the regulator and the regulated
I hope that the Reserve Bank remembers that its primary stakeholders are the public, and the representatives of the public (the Minister and members of Parliament), not the entities they are statutorily charged with regulating.
But to balance that unease, I want to give Fiennes kudos for one aspect of his speech. In my submission to the stocktake I had argued that if the Bank was serious about promoting market discipline, it shouldn’t be devoting undue time to refining disclosure statements, which the Bank quite openly states don’t contain the information the Bank itself uses. Instead, I argued, the Bank should require that all the private information the Reserve Bank now collects should be published on the relevant bank’s website at the same time it is supplied to the Bank. Recall that the Bank is keen to emphasise that creditors, not the Reserve Bank or the Crown, bear the losses in the event of a bank failure.
The Bank’s published response to the submissions did not deal with that proposal at all. But last night’s speech did. Here is what Fiennes said
As some of you may have read, several submitters argued that we should publish all of the information we receive through private reporting, potentially publishing a monthly dashboard of this information.
While this principle has some appeal, there are two main reasons why we do not consider it appropriate.
First, the potential trade-off between timeliness and data quality. We sometimes accept a marginal reduction in data quality in private reporting in exchange for receiving the information quickly. While this is appropriate for supervisory purposes, public disclosure needs to maintain a high minimum accuracy in order to support the credibility of the regime. This is underscored by the penalties in the legislation for false disclosure, and is an issue we are giving careful thought to in the design of the dashboard.
Second, there is the issue of commercial sensitivity. Often the private data we received is commercially sensitive, or might be open to misinterpretation if released without the appropriate context – especially if this was occurring in a situation of rapidly rising financial system risk.
At least now we can better understand the Bank’s objections. But I don’t find the counter-arguments persuasive.
Fiennes asserts that the Bank can “sometimes” live with a “marginal reduction in data quality…in exchange for receiving the information quickly”, but that they can’t possibly expose the public to this “marginal reduction”. But it is the money owned by the public that is at stake in these banks: Reserve Bank staff and management have nothing directly at stake. More generally, the Bank doesn’t seem to recognise that all sorts of real and financial markets trade on imperfect information all the time – in monetary policy, the constant revisions to GDP data for years afterwards are just the most obvious example. If the information is sufficiently valuable to the Reserve Bank that it will use statutory powers to compel banks to supply it (without charge) that information, then such timely information should be at least as valuable to the public who are investing with the banks. If the data really helps shed light on the financial positions of banks, investors have more use for it than officials.
The Reserve Bank’s other counter-argument is “commercial sensitivity”. But if the Reserve Bank really needs this timely information to do its job, how can depositors and other lenders not need it to evaluate the changing nature of the risks they are running? No doubt the same sorts of arguments were run when disclosure statements were first developed in the 1990s. Fiennes is also concerned that data might be “open to misinterpretation if released without the appropriate context” – but nothing stops the disclosing bank itself, or the Reserve Bank , or any private sector commentators providing that context. Any data can be misinterpreted – and can also be explained. Fiennes amplifies the point by arguing that misinterpretation is perhaps especially likely “in a situation of rapidly rising financial system risk”. But disclosure isn’t overly valuable to any creditor in good times – the value of having that information is precisely when actual and perceived risks are rising. And, to be boringly repetitive, it is depositors’ and investors’ money that is at stake.
Here was some of my discussion of the issues in my original submission:
Moving in the direction discussed just above would, of course, represent a substantial change in approach. Timely statistical returns of the sort banks supply to the Reserve Bank can’t first go through a full audit sign-off and director attestation, but the Reserve Bank itself – by its own revealed preferences – clearly thinks that in terms of knowing what is going on on a timely basis, those protections are less important than getting timely information. If things are very timely there will almost inevitably be the occasional error, but that is not an argument against the idea. After all, even Statistics New Zealand (perhaps even the Reserve Bank) occasionally finds mistakes in its data. The concern shouldn’t be errors – people are human and will err – but about the risk of being deceived. But adequate protections against deliberate attempts to deceive either the Reserve Bank or creditors (by deliberately supplying erroneous or misleading information) surely either already exist in statute or common law, or could be legislated separately. And the fact that the Reserve Bank’s own analysts would be reliant on the same data that were going public would provide an additional layer of comfort – since the Bank is readily able to ask, and require answers to, probing follow-up questions.
I am also not suggesting an absolutist approach to this issue. I have no problem with the answers to ad hoc inquiries by the Reserve Bank of an individual bank not being published. And in times when an individual institution may be approaching crisis, there probably inevitably needs to be a degree of confidentiality around the handling of that detailed information involved in crisis management (although such material should probably still be discoverable after the event). Indeed, protecting that sort of information was a part of the justification for the (now abused) section 105 secrecy provisions in the Reserve Bank Act. There is no foolproof dividing line, but I would suggest as a starting point that any statistical returns which are (a) regular, and (b) required of all (or a significant subset of) banks should be subject to my immediate disclosure rule. And perhaps the Reserve Bank Board could offer an attestation in its Annual Report that it has satisfied itself that staff and management are operating the system in a way that ensures all regular supervisory information is being made available to depositors and other creditors.
I still think the case for full and immediate publication of all regular bank statistical returns is strong.
New Zealand’s regime around depositor protection is extremely unusual internationally – something I will come back to in a follow-up post. We don’t protect depositors. Perhaps keeping information private – having the real oil only going to the Reserve Bank – might be acceptable in some idealised world in which bank regulators were consistently wise, insightful, benevolent and consistently right. (“we’ll look after everything for you”). But they aren’t. They are human beings, and their track record (around the world) isn’t particularly good. That isn’t a comment about the Reserve Bank of New Zealand in particular – it hasn’t been put to the test in the last 20 years – but about bank regulators more generally (and other regulators for that matter).
Regulators simply do not have the incentives to process and interpret information correctly – and it isn’t their money at stake. Sometimes they get too cosy with those they regulate. At other times, they get too cosy with their political masters. And often enough – being human – they simply pursue their own bureaucratic interests – a bigger agency, with more power, more information, not too much scrutiny and a quiet life. There isn’t much reason to think that Reserve Bank regulators will consistently make better use of ‘private data’ from banks better than the people who have lent to those banks will. Disclosure can be messy, and bureaucrats abhor messiness. But the contest of ideas and interpretations, and the intense scrutiny of available information (partial as it might often be), is the essence of competitive market processes. Tidiness, not so much. If regulators need data promptly, so do those who invest with the banks they regulate.
 The Bank told me a week ago they were going to post that release on their website (here), but have not yet done so. If anyone wants a copy of those submissions please email me. [UPDATE: The Bank has now posted the release.]