The OCR leak

The Reserve Bank has this afternoon released the Deloitte report into the possible leak of the OCR on 10 March, and a press statement from the Governor.

I have given comments to various media outlets, but thought I should set down my assessment for the record.

It is extremely disappointing that it has now been confirmed that there was a leak.  One MediaWorks employee in the media lock-up apparently emailed several of his colleagues outside the lock-up.  My involvement in this unfortunate episode arose because a MediaWorks employee sent me the email that is reproduced in the Deloitte report.

It is unfortunate that the Deloitte report does not (and probably was not asked to) look into how it was that the Reserve Bank’s systems for managing lock-ups for incredibly sensitive information were as insecure as they proved to be.  From the Deloitte report it seems that no underhand technology or secret signaling was involved; simply someone emailing from their laptop.  I’m no technology expert, but I’m staggered that such an easy breach could have occurred.  When systems are weak, sooner or later they will result in a breach, by accident or deliberately.   It is also unfortunate that the Governor’s press release does not address this issue.

The Reserve Bank’s overall response to the confirmation of the leak is the right one.  Ending media and analyst lock-ups is a step I recommended in a post several weeks ago, reflecting the vulnerability of such events (especially as technology has advanced), the fact that few or no other central banks provide any advance information in lock-ups, and the fact that such lock-ups have at times meant people inside the lock-ups have better information on the Bank’s interpretation of the documents than people who do not attend such events.    The new model will bring the Reserve Bank into line with standard international practice.  It is a model that would, I hope, have been adopted even if it had been confirmed that on this particular occasion no leak had occurred.

There are further steps that should still be adopted to minimize the risks of inadvertent early releases of the OCR.  For example, the lengthy lag between taking the OCR decision and releasing it should be shortened.  I was also surprised to learn from the Deloitte report that the Minister of Finance had been aware of the decision before 8:04am on the morning of the release.  When the OCR system was established in 1999, the practice was to advise the Minister only 10 minutes or so before the announcement.  If the Minister needs to know at all (and it isn’t clear why), 10 minutes notice should be an ample courtesy.

The Governor’s press release was disappointing on several counts.

First, it took no responsibility at all for the Bank having run systems and procedures that allowed this leak to have happened.  Of course, the leaker should not have leaked, but the Reserve Bank should have managed its procedures in a much more robust way to ensure that the leak could simply not have happened (especially in the easy way it appears to have).

Second, I was struck by the grudging gracelessness of the statement.  This inquiry, the associated discovery, and the subsequent change of procedures, would not have happened if I had not, at my own voluntary initiative, informed the Bank of the information I received.  It is as simple as that.  Unlike those in the lock-up and their employers, I am in no relationship of trust with the Bank, owe nothing in particular to them, and had actually valued the outlet that MediaWorks from time to time had provided for my commentaries and views.  And yet the statement offers not a word of appreciation or thanks to me; instead it criticizes me for not telling them about the information earlier.

“The fact that several people outside the Bank, who had access to the information improperly, failed to alert the Bank immediately, was irresponsible and left open a significant risk that the Bank could have closed down quickly with an immediate official release.”

As I have been clear all along, I never knew (until today) whether there had been a leak, or whether someone was just engaging in some big talk.   And the fact that there had been no market movement made me reluctant to believe there was a real leak –  as did the fact that I had worked at senior levels at the Bank for many years, and been under the impression that security at the lock-ups was fairly water-tight.

Moreover, as readers know, the Bank’s attitude towards me over the last year has not exactly been positive and cooperative.  Perhaps I could have gone to them at 8:20 and said “someone just told me you are cutting this morning”.  In fact, the thought didn’t cross my mind initially.  But when it did, my reaction was “what if they aren’t cutting.  They will simply scoff, and say “there goes Michael again””.  And so I kept the email to myself –  still not sure whether it was real news or not –  until I knew the Bank had cut, whereupon I passed the information on to the Assistant Governor and the Head of Communications.

I gather this “Michael was at fault” line is now part of their stock response (someone this afternoon told me that John McDermott had run that line to him previously).

MediaWorks people were at fault, and the Bank had weak systems that allowed a serious leak to occur.  Had I been less professional and more opportunistic, I could have put the text of the email on my blog as soon as I found it. After all, I was in no relationship of trust with the Reserve Bank.  Unsure whether it was for real or not, I reckon I still have enough credibility that doing so would have created a lot of damage.  But I didn’t do that: I kept it to myself and instead I told the Bank about it as soon as I was sure I was not going to look stupid.  I was simply caught in the middle of this – and have spent several weeks with people suggesting or implying that I had made it all up, was making allegations etc

The Governor is also misleading to suggest that even if I had alerted them earlier they could have avoided problems by immediately releasing the information themselves.  That might have been their reaction –  although they would surely have had to ask how seriously to take my information –  but it wouldn’t saved chaos, and might only have made things worse.  The hour before the OCR is released is a dead zone in New Zealand markets.  Many people abroad focus on New Zealand again just a few minutes before the scheduled time of the release.  To have released at 8:35. generating huge market movements, when they couldn’t even be sure that a leak had occurred (a week later they were still just talking of me making “allegations”) would have made life a lot harder for them, with plenty of aggrieved and vocal offshore people.

I guess I wouldn’t really have expected gratitude, but the graceless (and blame-shifting)  tone of the Governor’s statement is really something that should have been beneath the dignity of someone so senior.

 

 

31 thoughts on “The OCR leak

  1. Hi Mike

    You have probably become a bit of a thorn in the RBNZ’s side but, even allowing for that, I agree with you. The Governor had no right to expect you to advise the RBNZ of the existence of a rumour which you had no way of verifying. While the tone of the RBNZ statement is a bit surprising it is entirely consistent with an organisation which can not acknowledge that it might just possibly have made the odd tiny mistake in monetary policy decisions over the last couple of years. They really do seem to have circled the wagons up there.

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  2. Well said, Michael. I hope The senior management team at the RBNZ read your explanation.
    For them to have released that report without first talking with you to find out what really happened is extremely churlish behaviour, to say the least.

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  3. Michael, your blog has certainly shined a huge light on the activities of the RBNZ. I have, for many years been rather concerned at the superstar status of the RBNZ and its governor making decisions that impact on thousands of businesses and lives with economists and the government accepting their decisions as gospel. It is important that the RBNZ be under pressure to properly justify their OCR decisions or at the least be put under the spotlight.

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  4. “Latest housing market data scare us to death but that’s been the case for a while and the RBNZ glossed over it in March. So why change now? What it does mean, however, is that the prospect of tighter macro-prudential policy is heightened.” Stephen Toplis

    I do not believe the RBNZ should cut any further as savers spending prowess is being further eroded, however if the RBNZ do not cut, savings deposits would continue to climb further beyond the already high $152 billion and if the RBNZ digs deep into the macroprudential tool kit, that would further prevent the banks from lending out to balance the extremely high savings that NZ depositors already have sitting bank deposit accounts.

    I can understand Stephen Toplis concern.

    The RBNZ will have to rethink the risk that a high savings have on bank stability as banks net asset position could be impaired as savings rises faster than the bank is able to lend out.

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    • Getgreatstuff, by writing “The RBNZ will have to rethink the risk that a high savings have on bank stability as banks net asset position could be impaired as savings rises faster than the bank is able to lend out.” you have unequivocally demonstrated that you have yet to understand how the present debt-based banking and monetary system actually works.

      Please get this:

      “Two misconceptions about money creation
      The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.
      In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.” — paper published by the Bank of England in its Quarterly Bulletin, Q1 2014.

      The URL for the paper is:

      http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

      I’ve led you to the water, so please stop horsing around and do the decent thing and drink!

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      • PJM, the problem with reading these articles and quoting them as gospel is that you forget that a bank like any business records a balance sheet or a statement of performance. That statement of performance always has to net to zero. A bank operates like a wholesaler. They have a contract to buy (ie a contract to take savings from depositors) and a contract to sell (ie a contract to lend money to borrowers). when a bank creates a contract with borrowers it is the same with a wholesaler, it creates a sale. There is no contract between the supplier of the product and and the end customer. The wholesaler is the intermediary. The bank in a similar fashion creates lending contracts with the borrower which are quite independent of the savings depositor. The bank acting as a intermediary. Yes the bank can create lending contracts freely like the wholesaler can keep creating new invoices for sale but at some time there is a delivery of product and as with a bank there needs to be a transfer of savings, whether it is local savings or it is overseas savings. It is always a zero sum game.

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      • “Banks are only raising a relatively small share of their funding from overseas at this point in time. They’re continuing to see very strong deposit growth. Most of the credit expansion that’s going on has been funded through deposits,” Hodgetts said.

        PJM, note RBNZ reference to strong savings deposit growth. Best you stop misinterpreting the articles you read.

        http://www.interest.co.nz/news/80526/rbnzs-wheeler-says-he-expects-all-25-bps-cut-ocr-be-passed-floating-rates-rbnzs-hodgetts

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  5. Hi Michael, your actions on the day seemed prudent and they have helped prompt a sensible and probably overdue change to procedures around the MPS. best regards.

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  6. I was going to say perhaps you are reading too much into the comments about you from RBNZ, but even the tone of Deloitte’s report about you (section 2.10) seems biased. Specifically, “…but he did not notify RBNZ that he had received the communication until 9.08am on the same morning. Mr Reddell explained to us that he did not immediately notify RBNZ because…”. No comment from them on why you were obliged to notify them prior to 9:08, nor comment on why you were required to explain your actions. I can’t imagine there is a NZ law covering RBNZ lock-ups.

    I think Deloitte’s should be embarrassed to have worded their report in such a way. But perhaps they were just trying to pad out the report, as there is very little else in it.

    I notice Mike Hannah’s comment in the press release “The blogger only alerted the Bank to the leak after the MPS was officially released”. The use of the word “only” makes all the difference to how it is interpreted.

    Two other things I thought about. 1) I wonder if anyone did do anything to profit from this incident, and, 2) has it happened previously.

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  7. I thought the comment was very poorly worded. I don’t agree with your assessment at all in a number of situations. However, that is no reason to treat you with such peevish disrespect. The breach was clearly due to RBNZ actions. The fact that they are trying to deflect criticism away from their weak security measures is a regrettable one. It won’t and will not ever wash.

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  8. Pretty disappointing this leak occurred I agree. But surely someone should be being prosecuted as there must be some legal breach? Or at least the journalist/s fired by media works given they are clearly not trustworthy? I also wondered if this has been done before but not discovered – did mediaworks check emails from other OCR lock ups these journalists have attended?

    Sent from my iPad

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  9. Pretty disappointing this leak occurred I agree. But surely someone should be being prosecuted as there must be some legal breach? Or at least the journalist/s fired by media works given they are clearly not trustworthy? I also wondered if this has been done before but not discovered – did mediaworks check emails from other OCR lock ups these journalists have attended? Michael Reddell posted: “The Reserve Bank has this afternoon released the PWC report into the possible leak of the OCR on 10 March, and a press statement from the Governor. I have given comments to various media outlets, but thought I should set down my assessment for the record”

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  10. Two interesting points Kelly. Not sure about the legal position – I noticed FMA said they weren’t investigating, but this is probably a civil matter (breach of MediaWorks undertakings to the RB?) and I can’t imagine the RB will want more publicity for this episode and what it says about their really weak lock-up security.

    I had also wondered about earlier occasions. Whether by accident, or otherwise, it could have happened previously, by any participants in either lockups. It is an disconcerting thought, although I’m not sure there is much to gain by a more extensive investigation now.

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  11. getgreatstuff, you evidently believe that you are more knowledgeable on the present debt-based banking and monetary system than the economists of the Bank of England!

    Your comment is totally irrelevant to the way in which the present debt-based banking and monetary system actually works — but of course, you wouldn’t know that, so let’s just agree to disagree.

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    • PJM, clearly you suffer from a myopic view that banking is some mystical magical world forgetting that it is a zero sum game. The RBNZ has clearly indicated that savings deposits are on a rise in NZ and the resultant credit expansion is the result. Clearly you have got yourself lost in economists jargon.

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      • Getgreatstuff, please clearly explain exactly how your concept of a “zero sum game” relates to the way in which banks create money ex nihilo in the act of making ‘loans’, and please do it language that a mere professional engineer can easily understand.

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      • It is called a fully audited set of financial statements. Every transaction is audited by an army of highly paid and highly qualified accountants and the net effect of a balance sheet is always zero. For every debit there is a credit. There is no financial transaction that exists without a corresponding opposite entry. Debits always equal credit.

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      • All of which is totally irrelevant to the fact that every time a bank grants a loan, it creates the loan principal out of nothing, simply by typing the loan amount into the borrower’s bank account. Bank lending creates bank deposits, which we the people elect to use as electronic money, simply because it is so much more convenient that our using RBNZ-created notes and coins. What is it about this that you do not understand?

        The Sovereign Money proposal is simply to repeal the successors of the Promissory Notes Act 1704, making it illegal for banks to continue as they are, and forcing them to become financial intermediaries taking in RBNZ-created electronic money from savers, aggregating it, and lending it to borrowers, making an honest living from the margins between the interest rates that they pay savers and the interest rates that they charge borrowers. What is it about this that you do not understand?

        In a Sovereign Money system, the RBNZ would create just sufficient electronic money to keep pace with economic growth, and gift it, free of debt and free of interest, to the government for spending into the real economy according to its democratic mandate, with a corresponding reduction in annual taxation of between $7.5 billion and $12.5 billion, depending on whether the desired rate of CPI inflation was 0% through to 2%. Our money would therefore cease to be interest-bearing debt to banks. What is it about this that you do not understand?

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      • PJM, you are making the mistake of looking at only one side of the transaction. A loan is created because a contract is drawn up between the bank and the customer. It is the same as any business that create a sale. They draw up contracts with the customer. They are all entries on a computer screen. But those created entries do not exist in isolation. At some point a business has to deliver product and in the banks case a settlement occurs. The loan has to be funded from somewhere, it can come from shareholders capital, it can come from savings deposits or from overseas savings or the bank can borrow from another bank to settle the loan. The bank merely acts as an intermediary. Think of a wholesaler that buys products from suppliers. He signs a separate contract with the supplier. There are 2 separate and independent contracts. One with the supplier and one with the customer. They are not tied to each other. Same way a bank operates. They have depositors and they have customers. The contracts are independent. But at some point you have to deliver on settlement. Someone gets paid. Financial transactions are always double entry. Someone wins someone lose. Debtor nations and creditor nations. Ying and yang.

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      • getgreatstuff, it is plainly evident that you still do not understand how banking currently works. Please answer me this one question: Have you read any one of
        1. The Bank of England paper “Money creation in the modern economy”
        2. The Bank of England paper “Banks are not intermediaries of loanable funds — and why this matters”
        3. The Report of the NZ Royal Commission into Banking, Monetary and Credit Systems, 1956.

        I have read and understood them all, and each one spells it out precisely, exactly as I have tried to teach you. Oh, but you don’t believe them, because you’re soooooooo incredibly knowledgeable — not!

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      • The balance sheet is always relevant. If you do not understand the balance sheet, anything you have read and formulated your thinking is fantasy.

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      • PJM, if you understand what you have read please explain how OBR would be used to repair a banks solvency position in the event of asset impairment( ie loans become non performing and bank faces a write down of the loan book)due to a collapse in house prices?

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  12. getgreatstuff, please don’t try the politicians’ trick of not answering the question and instead attempt to divert your questioner by yourself ignoring it and asking another question.

    I repeat:

    Please answer me this one question: Have you read any one of
    1. The Bank of England paper “Money creation in the modern economy”
    2. The Bank of England paper “Banks are not intermediaries of loanable funds — and why this matters”
    3. The Report of the NZ Royal Commission into Banking, Monetary and Credit Systems, 1956.

    I have read and understood them all, and each one spells it out precisely, exactly as I have tried to teach you.

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  13. OK: PJM and getgreatstuff, I think that is quite enough of that debate here for now. The tone seems to be descending towards abuse, and none of the comments relate to this particular post at all. For what it is worth, I continue to think you are to some considerable extent talking across each other, and at somewhat cross purposes.

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    • Apologies. I am just so very surprised that articles are quoted as gospel by wannabe economists without first understanding the foundations and the base principle of financial transactions. I believe we do need highly qualified accountants in the top echelons of the RBNZ because I see the same fundamental issues with many comments from economists.

      When a business fails they do not call an economist. They call an accountant.

      I do understand that PJM and I are talking at cross purposes but my intent was for him to go down to basics and to test the actual transaction flow to see if his theory stacks up because you can never win an argument with a professional that has formed a opinion.

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      • And my intent was to find out if getgreatstuff has actually read any one of:

        1. The Bank of England paper “Money creation in the modern economy”
        2. The Bank of England paper “Banks are not intermediaries of loanable funds — and why this matters”
        3. The Report of the NZ Royal Commission into Banking, Monetary and Credit Systems, 1956.

        By his refusal to answer this simple question with either a “Yes, I have read no. 1, an/or 2 and/or 3”, or “No” I am left to surmise that it is very highly likely that if he answered, his answer would be “No”.

        An argument is an exchange of ignorance, whereas a discussion is an exchange of knowledge.

        I would much prefer to have a discussion, but first, getgreatstuff must answer my simple question!

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