In July last year, while the Reserve Bank was consulting on the latest extension in its (seemingly) ever-widening web of controls –  this one, restricting mortgages for residential investment properties to 60 per cent LVRs –  David Hisco, the chief executive of the local arm of the ANZ bank, went very public arguing that the Reserve Bank wasn’t going far enough.

Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.

It was an interesting stance.  As I noted at the time (a) there was nothing at all to stop the ANZ tightening up its lending conditions along those lines if they thought such restriction was prudent, but (b) the ANZ’s own economics team, in a piece issued the very same week, had been less than convinced of the case for even the Reserve Bank’s own more-modest proposed restrictions.

To us, the case for requiring investors to have a 40% deposit is not overly
strong. This is particularly considering the RBNZ’s own stress tests and the fact that most investor lending was already done at sub-70 LVRs anyway.

I noted then that

There must be some interesting conversations going on at the ANZ.  It would be very interesting to see the ANZ submission on the Reserve Bank’s proposals, and if the Reserve Bank won’t release it, there is nothing to stop ANZ itself doing so.  I’ll be surprised if they do, and even more surprised if the submission recommends limiting all investors throughout the country to LVRs not in excess of 40 per cent.

The Reserve Bank has long been quite resistant to releasing submissions made on regulatory proposals –  even though if, say, you make a submission to a select committee on a proposed new law that submission will routinely, and quite quickly, be published.  Under pressure, the Reserve Bank has slowly been backing away. First, they agreed to release submissions from entities they didn’t regulate, while refusing to release anything from regulated entities (banks in this case).  They rely in their defence on a provision of the Reserve Bank Act which, even if it legally means what the Bank has claimed it does, was never intended to enable permanent secrecy for submissions on general policy proposals.  The Bank has now reviewed its stance again, and has now agreed to release/publish submissions made by regulated entities but only if those entities themselves consent (and subject to normal provisions allowing commercially sensitive information to be withheld).  Partly presumably because I had appealed to the Ombudsman over the withholding of bank submissions on last year’s extension of the LVR controls, they have now decided to apply this new stance retrospectively.

Yesterday I received a letter from the Reserve Bank

The Reserve Bank has sought the consent of the registered banks to provide to you their submissions from the consultation on adjustments to restrictions on high-LVR residential mortgage lending. We have obtained consent from ANZ Bank to release its submission to the consultation. Accordingly, the submission from ANZ Bank is being provided to you under the provisions of section 105(2)(a) of the Reserve Bank of New Zealand Act 1989.  Some parts of the submission have been redacted by ANZ Bank as a condition of its consent.

Other registered banks have not provided consent and submissions provided by other registered banks continue to be withheld

Of course, ANZ could have released the submission itself months ago, but they still deserve credit for agreeing to the release even at this late date.   I hope this move foreshadows routine willingness to allow ANZ submissions to the Reserve Bank to be published.

The ANZ stance contrasts very favourably with that of the other banks.    Given the risks of regulators and the regulated getting too close to each other, at risk to the public interest, getting the submissions of regulated entities published should be a basic feature of open government, and the continued reluctance doesn’t reflect well on either the Reserve Bank or the other commercial banks.  What do they have to hide?

Apparently the Reserve Bank will be putting a link to the ANZ submission (as redacted) on their website shortly [now there, together with all the other LVR submissions and material they’ve released over the years] but for now here it is.

anz-response-to-lvr-consultation

Perhaps to no one’s surprise, there is nothing in the submission suggesting that ANZ would have favoured a more restrictive approach (of the sort outlined by the chief executive a few weeks earlier).

It wouldn’t have cost them anything to have advocated the chief executive’s preferred position –  after all, it wasn’t likely that the Reserve Bank would adopt it anyway –  but there is no suggestion, not even a hint, that our largest commercial bank thought the Reserve Bank wasn’t going far enough.

I noted at the time

But I don’t suppose we will actually see ANZ move to ban all mortgages for residential investors with LVRs in excess of 40 per cent.  Instead, Hisco wants the Reserve Bank to do it for him.    That would enable him to tell his Board that he simply had no choice, and provide cover when profits fell below shareholder expectations.  That should be no way to run a business in a market economy –  although sadly too often it is.

Reality seems to be even worse, in some respects.   Not only did ANZ not pull its own LVR limits back to 40 per cent, they didn’t even take the opportunity of a (then) private submission to the regulator to make their case for a tougher policy.  Instead, it looks a lot like they were just going for the free publicity of a call for bold action, while never having had any intention of doing anything about it.   It isn’t exactly straightforward.  Of course, they are free to do it if they can get away with it, but it doesn’t look like the sort of ethical behaviour we might hope for from senior figures in major financial institutions.

Although the Reserve Bank was consulting on extending LVR restrictions, quite a lot of the ANZ’s submission is devoted to what appear to be mostly sensible concerns about the possible extension of the regulatory net to include debt to income limits.  The Reserve Bank is apparently about to launch a consultation on the possible addition of debt to income limits to its “approved” tool-kit (technically it doesn’t need anyone’s approval to use them).  I hope that the forthcoming consultative document takes seriously the practical problems various people, including the ANZ, have already raised.

I welcomed the recent decision of the Minister of Finance to require the Reserve Bank to undertake public consultation now, not just at the point they want to use DTIs.  Perhaps his motivations were somewhat mixed –  there is after all an election only a few months away –  but there is probably a better chance of the Governor taking submissions seriously now than at a point when the Governor has already decided he wants to use the tool, perhaps as a matter of urgency.    Having said all that, I was a little bemused at the suggestion from the Minister that the Reserve Bank should now do a cost-benefit analysis on the use of DTIs. I’m all in favour of such analysis, and am concerned that too often there is no attempt to quantify the costs and benefits of proposed interventions, but……it isn’t clear how one can do a cost-benefit analysis on an intervention except in the specific circumstances that might arguably warrant the deployment of the instrument.  One surely needs to know the specific threat to be able to evaluate the chance that a proposed intervention might mitigate the risks?