Bank capital: (not) consulting with APRA

After I’d posted yesterday, a reader made this comment about an article which apparently appeared in the Australian Financial Review yesterday

I see the AFR reporting today that APRA say they were “consulted” about the RBNZ release last Friday which was the document’s release date.

That account seemed consistent with a comment I’d seen in The Australian the previous day in which APRA indicated that they would be consulting with the Reserve Bank on its proposals, but with no indication that there had been any prior consultation.  If so, that seems extraordinary.

My reader went on to ask

Is there any protocol for consultation between APRA and RBNZ on these types of regulatory issues? It seems surprising to me that the RBNZ could propose something so radical without a genuine prior discussion with the regulator of the banks who dominate the NZ financial system.

I can only endorse that second sentence.  If anything, it seems like an understatement.

There are reciprocal provisions in the New Zealand and Australian legislation (the New Zealand provision is here), but they are mostly about doing whatever possible to avoid damage to the other country’s financial system (especially in crisis resolution).  There is also an RBNZ/APRA MOU, but it is mostly about ongoing supervision of trans-Tasman banks.   There is this brief, rather minimalistic, section

Regulatory Policy Development
25. The Authorities expect to respond to requests for information on their respective national regulatory systems and inform each other about major changes, including those that have a significant bearing on the activities of Cross-border Establishments.

But not every expectation of reasonable and appropriate behaviour should need to be written down.

Searching the Reserve Bank’s consultative document for references to APRA, it seemed telling that the Bank referred a couple of times to the possibility of aligning with APRA standards around the idea (questionable) of introducing a leverage ratio, but has no discussion at all about the merits (or otherwise) of introducing new capital requirements so far in excess of those APRA imposes (requirements called “radical” by one of the ratings agencies).

And yet the risks the two countries’ banking systems are exposed to seem very similar, and much the same banking groups are involved.   And when the senior management of our Reserve Bank is pretty new to these sorts of issues, and when the Bank consciously chose to dis-establish its own risk modelling capability several years ago, it is hard not to think that the Reserve Bank would have benefited from serious consultations with APRA (at various levels of the respective organisations) even as the Governor retained the right to come to his own decision.   There is a suggestion that the Governor has a bit of chip on his shoulder about Australia and Australian banks.  Whether that is true or not, if the indications of lack of prior consultation are correct, it isn’t good enough.  But I suppose it parallels the apparent lack of any systematic advance consultation –  technical papers, seminars etc –  with people outside the Bank in New Zealand either.     It might be interesting for someone to ask them who they actually did consult with (other than (apparently) Professors Admati and Hellwig).  Even within government, how much prior consultation was there with The Treasury or the Minister of Finance?

The New Zealand legislation may, misguidedly and for the time being, give the Governor the barely-trammelled power to make these decisions, but it is important to recognise that the Reserve Bank (the Governor) neither bears the costs of these decisions (whether they work out well or not) nor gets any benefits from them.  Great power –  in a single person’s hands – and yet not much incentive to get things right.  That is a worrying combination.

After yesterday’s post, another reader sent me this line from Adam Smith

The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

The Wealth of Nations, , Book IV, Chapter II

The full quote is mostly about a slightly different point, but as my reader noted the final couple of lines seemed particularly apposite.

 

2 thoughts on “Bank capital: (not) consulting with APRA

  1. Perhaps Adrian Orr has a problem with the $5 billion in profits transferred to Australia each year from NZ whilst NZ staff are made to work in a modern slave labour environment of unachievable targets?

    Like

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