Day: November 2, 2018

Restructuring the Reserve Bank

Michael Reddell Adrian Orr, Reserve Bank, Reserve Bank Act reforms

Seven months (and counting) into his term as Governor, Adrian Orr still hasn’t deigned to deliver an on-the-record speech on either of his main areas of statutory responsibility (monetary policy and financial stability) but he has this morning done what it seems almost all new CEOs –  public sector and private sector –  now do, and restructured his senior management, ousting or demoting several top managers, elevating one or two, and opening up a raft of vacancies.  Public sector senior management restructurings seem to generate most of the Situations Vacant business for the Dominion-Post newspaper these days.

A few people have asked my thoughts on the restructuring, so…..

As a first observation, I give credit to the Governor for resisting the temptation of across the board grade inflation (although there is at least one example, see below).  Every public sector senior management advert one sees –  I pay attention mostly because my wife has been in the market – is full of Deputy Chief Executive roles (not infrequently five or ten of them).  The Bank’s Act constrains the number of Deputy Governor positions (only one, in the bill before the House at present) but if he’d wanted to, all these SLT positions could have been designated Deputy Chief Executive roles.  As it is, having resisted title inflation, the Governor might find some potential applicants a bit more hesistant than otherwise: an Assistant Governor (even for Economics, Financial, and Banking) may sound less glamorous than a Deputy Chief Executive title.

This is the new structure, which looks a lot like those for all manner of public sector organisations.new-leadership-team-structure

Three of those positions are filled straight away.

Appointments to Senior Leadership Team
Geoff Bascand – (Currently Deputy Governor and Head of Financial Stability) has accepted a role on the SLT as Deputy Governor and General Manager of Financial Stability.
Lindsay Jenkin (currently Head of Human Resources) has accepted a role on the SLT as Assistant Governor/General Manager of People and Culture
Mike Wolyncewicz (currently Chief Financial Officer and Head of Financial Services Group) has accepted a role on the SLT as Assistant Governor/ Chief Financial Officer Finance.

Of those two appointments (Bascand and Wolyncewicz) seem sensible and appropriate.  Bascand currently holds a statutory Deputy Governor appointment and would have been hard to shift even if the Governor had wanted him out.  His role is slightly –  though perhaps sensibly – diminished as he will no longer have overall senior management responsibility for financial markets.

To be blunt, the new Assistant Governor for People and Culture has the feel of tokenism on two counts.   The first count relates to the current tendency for HR managers to be given glorified titles and to report directly to the chief executive (the message supposedly being “we value our people”, as if organisations never did when HR was a fairly low-level support role).  Line managers are the people who convey (by their actions mostly) to staff the extent to which they are valued (or otherwise).   And the second relates to the incumbent, who just is not particularly impressive.  As someone put it to me, perhaps she might be okay in some modest commercial operation, but she never showed any sign of being suited for a key leadership role in a significant policy organisation.  But….she is a woman, and in promoting her Adrian Orr manages –  after 84 years –  to have a woman in a top tier role (although still not in a key role in policy or operational areas, the raison d’etre for the organisation).   It will have been an easy win to simply grade-inflate the Manager, Human Resources role.  After all, as he said a few months ago

We will be working actively. We are just going to have to be far more aggressive at getting the gender balance balanced,” Orr said in a recent interview

(And before I get angry emails or anonymous comments from past or present Reserve Bank staff, I will reiterate my view –  and it is only mine –  that there are no conceivable grounds on which Lindsay Jenkin would be in the top tier of a major policy organisation other than her sex.  I wish it were otherwise.)

In the entire restructuring, the person one should probably feel most sorry for is Sean Mills, Assistant Governor and Head of Operations, whose job is dis-established and who is leaving the Bank, having joined under a year ago.  I suppose he knew the risks –  taking on a direct report job in the hiatus between Governors, when no one had any idea who the new Governor would be or what structure he or she would prefer.  I’ve never met Mills, and have heard nothing good or bad about him, but it is always a bit tough to lose your job after less than a year.

Two long-serving key senior managers –  both in their roles for 11 years now –  are demoted as part of the restructuring, one perhaps a bit more obviously than the other.

The first is Toby Fiennes, currently Head of Prudential Supervision.  His role –  a big job –  appears to have been split in two.

Toby Fiennes (currently Head of Prudential Supervision Department) has accepted the role of Head of Department for Financial Stability Policy and Analytics.

with one of his current managers (very able) taking up the role responsible for actual oversight of financial institutions.

Andy Wood has accepted the new role of Head of Department for Financial System Oversight.

I always had some time for Fiennes (although I’ve probably criticised speeches and articles here) and thought him in some respects the best of the main departmental heads.  Perhaps it is just that the job has gotten so big that the Governor no longer wanted one person doing it, but the new role is much-diminished relative to what he has been doing for the last decade.   And Geoff Bascand already had the key overall financial stability role, so there was no possible promotion opportunity.

The bigger, and more obvious, demotion is that of (current) Assistant Governor and Head of Economics, John McDermott.

John McDermott (currently Assistant Governor and Head of Economics) has accepted the role of Chief Economist and Head of Department for Economics in the Economics, Financial Markets and Banking Group.

After 11.5 years as a direct report to the Governor, and almost as long with the Assistant Governor title, McDermott loses both.

I’m always hesitant to write much about McDermott.  He was my boss for six years, and while we had our differences we sat across from each other for years and exchanged views on all manner of work and family things.  I liked him, was looking just the other day at the personal gift he gave me when I left the Bank, and I was genuinely pleased to applaud his daughter’s award the other night at the Wellington East Girls’ College prizegiving.

Unfortunately, I don’t think he was the person for the role he has held for eleven years, and which he never really grew into or made of that position what it should have become.  He has a strong track record as a researcher, and apparently was for quite a while the most widely-cited New Zealand economics researcher, but the key senior manager for monetary policy –  effectively a deputy governor without the title – required more than McDermott had to offer.   In public view, this was apparent in speeches and Monetary Policy Statement press conferences.  And thus, sad as it perhaps is for John, I think the Governor has made the right choice.  Whether McDermott stays for much longer in the diminished position he will now take up perhaps depends a lot on who gets vacant (and crucial) new role of Assistant Governor for Economics, Financial Markets, and Banking).

Two other senior managers in core roles leaving the Bank

Mark Perry (Head of Financial Markets)…..elected to leave the Reserve Bank.

Bernard Hodgetts (Head of Macro-Financial Department, who is currently seconded as Director Reserve Bank Review in the Treasury) has also chosen to leave the Reserve Bank after he finishes his role leading the review.

The Head of Department for Financial Markets won’t be an easy role to fill –  I wouldn’t have thought there were any obvious internal candidates.

Three more comments on the review:

  • even if a role like “Assistant Governor, Governance, Strategy and Corporate Relations” is the sort of title one sees in lots of government agencies, it feels like another example of grade inflation.  Presumably this involves the communications functions, the Board Secretary, and churning out the myriad hoop-jumping documents like the Statement of Intent.  People with “strategy” in their title in public sector organisation are rarely at the heart of what the organisation do.
  • there will be a lot of focus on who gets the role of Assistant Governor, Economics, Financial Markets, and Banking.  This is (slightly) bigger role than Murray Sherwin held 20 years ago, without the benefit of the Deputy Governor title.    We will have to wait until the adverts appear to see whether the Governor is after a policy leader (someone who really knows this stuff) or a generic public service manager.  If –  as I hope –  the former, it has been speculated to me that the Governor may try to attract back to the Bank the current Treasury chief economist Tim Ng (whose talents would be better used doing almost anything than wellbeing budgets).  Another possibility is the current Treasury deputy secretary for macro, Bryan Chapple who has a central banking background and led some of the financial markets reform work at MBIE.  No doubt there will be others applying, especially as the holder of the position is almost certainly to be a statutory appointee to the new Monetary Policy Committee.
  • this restructuring also probably helps clarify who will be the four internal members of the new Monetary Policy Committee.  The Governor and Deputy Governor will be members ex officio, and it is hard to see how the other positions would not be given to the Assistant Governor, Economics, Financial Markets,and Banking) and to John McDermott, as head of the Economics Department.

Overall, the restructuring is quite a mixed bag.   There are some good appointments and some poor ones already, and quite a lot will depend on a handful of the remaining appointments (especially the quality of person they can attract to that Assistant Governor role –  which, notwithstanding my earlier cautions about grade inflation, really should be a deputy chief executive position, both for recruitment reasons and for the stature and standing of the person in international central banking circles).

If I have a caveat about the overall structure, it is probably that the Bank would be better for having at least one senior policy person –  whether as Deputy Governor or so Advisor to the Governor –  who didn’t have a demanding line management role.  Such roles aren’t uncommon in other central banks, but I guess it depends on the Governor’s own preferred operating style.

And since I have the opportunity of a post about the Bank, I should note that I have not abandoned the issue of the Governor’s total non-transparency in respect of his speech about transparency to the Transparency International AGM (at which he was introduced by the State Services Commissioner, who has responsibilities for open government).  I am pleased to see this issue has had a little bit of media attention, including this article which pointed out that 90 per cent of Transparency International’s funding comes from the taxpayer.  I have an Official Information Act request in with the Bank for any briefing notes or text the Governor used, for any recordings that may exist, and if none do for a summary of what was said (memories –  very fresh, since I lodged the request within hours of the Governor delivering his speech – are official information too.   I don’t expect much, but there is a point to be made –  all the more so given the topic, the audience, the introducer, and the funding source for the body to which he was speaking. I can’t imagine Orr said anything very controversial, in which case why the secrecy? And if what he said was controversial –  foreshadowing for example Monday’s forthcoming culture review – it shouldn’t be said only to select private audiences.  It was simply an unnecessary own-goal, some sort of silly reassertion (perhaps Wheeler like) of a Reserve Bank perception that it really should be above such trivial matters as disclosure, transparency and the Official Information Act.

 

Local listing for banks: a case for one in particular

Michael Reddell Banking, Uncategorized

There was a very strange article in the Herald yesterday from one Duncan Bridgeman claiming that it was, in the words of the hard copy headline “Time to force Aussie banks to list in NZ”.

What wasn’t at all clear was why.

Bank profit announcements seemed to be the prompt for the column

Australian banks reaping huge profits from their New Zealand customers is a perennial scab that gets ripped off every time financial results come in.

I’m not persuaded the banks earn excessive profits here, but I know some other serious people take the opposite view.  But even if they are right, surely that is a competition policy issue –  the case for one of the new market studies perhaps, and any resulting recommendations.  There is nothing in the article explaining how forcing the Australian banks to sell down part of their New Zealand operations would affect, for the better, competition in the New Zealand banking services market.

The other prompt appear to be industry developments in Australia

Meanwhile, Australia’s big banks are starting to move away from vertical integration, partly because of conflicts of interest but also because their financial services model is unlikely to sustain the same profits over the longer term.

Suncorp, ANZ, CBA and NAB have all divested their life insurance operations. The latter two have also announced plans to spin off their wealth management operations. Westpac remains wedded to these areas of business but is expected to follow suit at some point.

And just last week financial services firm AMP, also heavily damaged by the banking royal commission, announced the sale of its wealth protection unit to US firm Resolution Life for A$3.3 billion and divulged plans to offload its New Zealand wealth management and advice businesses through a public offer and NZX listing next year.

But not one of those divestments has anything to do with core banking operations, unlike the approach Bridgeman appears to be proposing for the New Zealand bank subsidiaries.

A not unimportant word that one –   subsidiaries.  Presumably Bridgeman is fully aware, even though his article doesn’t mention, that all four Australian banks do the bulk of their New Zealand business not through branches, but through legally separate New Zealand subsidiary companies, with their own boards of directors (and statutory duties). (New Zealand compels them to do so, at least in respect of the retail business).

But when I read this paragraph I had to wonder if he really did appreciate that.

But if ever there was a time to raise the prospect of some form of domestic ownership and oversight of the banks, it is now.

The problem is it will never happen unless the Aussie banks are forced to by our politicians and regulators. After all, the last thing the banks want right now is another regulator to answer to.

Yet, why should it be accepted that four of this country’s five most profitable companies are effectively regulated in Australia?

The New Zealand subsidiaries are fully subject to New Zealand law: competition law, prudential regulation, financial conduct law, health and safety law.  The lot.  (Even the branches are subject to much New Zealand law, but leave them aside for now.)   The Reserve Bank of New Zealand sets minimum capital standards. minimum liquidity standards, disclosure requirements and so on.

Of course, since the New Zealand subsidiaries are part of much larger Australian-based banking groups, APRA’s regulations and requirements for the group can also be binding  –  not on the New Zealand business itself, but on the group as a whole.   APRA can, in effect, hold the local subsidiaries to higher requirements than those set by our Reserve Bank  (in just the same way that shareholders might voluntarily choose –  perhaps under rating agency pressure – higher standards than a regulator might impose), but it can’t undercut New Zealand standards for New Zealand operations.  Daft as they may be, New Zealand LVR restrictions are binding on banks operating in New Zealand.

Bridgeman goes on

Theoretically an Aussie bank could offload 25 per cent of the institution’s New Zealand assets and list the shares here separately. That would bring tax advantages to New Zealand investors who can’t use Australian franking credits, even though they are dual listed.

I presume he means selling off 25 per cent of the shares in the New Zealand subsidiary (rather than 25 per cent of the assets).  It would, no doubt, have tax advantages for New Zealand investors (and thus, in principle, the shares might command a higher price), and yet the banks haven’t regarded it as worth their while (value-maximising) to do so.    Bridgeman doesn’t look at question of why (presumably something about best capturing value for shareholders by holding all of the operations in both countries, and being able to  –  subject to legal restrictions and duties –  manage them together).

And he also doesn’t note that if, say, ANZ sold down 25 per cent of the shares in its New Zealand operation, the subsidiary will still be regarded by APRA as part of the wider banking group, and prudential standards will still apply to the group as a whole.  As they should –  after all, with a 75 per cent stake there would be a high expectation (from market, regulators and governments) of parental support in the event that something went wrong in New Zealand.

There is a suggestion that the article is a bit an advertorial for NZX

If a quarter of these assets were listed that would bring about $12.5b of capital to the local stock exchange – a badly needed injection at a time when the main market is shrinking.

But even then it isn’t clear what is meant.  It isn’t as if there is a new $12.5 billion (I haven’t checked his numbers) of local savings conjured up.   Buying one lot of shares would, presumably, mean selling some other assets.  In a country with quite low levels of foreign investment, the initial effect of any such floats would be to reduce that level further.  (Of course, in practice quite a few of the shares in any newly floated New Zealand subsidiaries would be picked up by foreign investment funds, leaving the alleged benefits of any compulsory selldowns even more elusive.)

Bridgeman ends with a rallying cry

And right now the Aussie banks are distracted with a battle on their home turf.

It’s the perfect time for some Coalition politicians to show some backbone and make a case for a change in this direction.

It might have appealed to Winston Peters once upon a time, but even if it weren’t a daft policy to start with, Bridgeman may have noticed that business confidence is at rather a low ebb right now.  Arbitrarily interfering in the private property rights of owners of private businesses – even if largely Australian ones –  wouldn’t be likely to do much to instill confidence in the soundness of policymaking.

As it is, they could start closer to home.  If governments really did want to focus on getting some more bank representation on the domestic stock exchange –  and it is not obvious why they would –  perhaps they could look at the New Zealand banks first.  After all, only one of them (Heartland) is sharemarket listed.  And the biggest of those New Zealand owned banks –  Kiwibank – is actually owned by the government itself.    In fact,  by three separate goverment agencies (NZ Post, ACC, and NZSF), none bringing obvious expertise to the business of retail banking, none themselves facing any effective market disciplines.  I’d be all in favour of a well-managed float of Kiwibank  (although once floated it might not last long as an independent entity).  There are good reasons (they’ve been there for years) for the government to consider seriously that option.  But there are no good reasons to force well-functioning locally regulated foreign-owned banks to sell down part of their operations in New Zealand.