There have been a couple of media stories this week that were less than flattering about the Governor of the Reserve Bank, Adrian Orr. I was going to say “new Governor”, but checking the calendar I see that in another month or so he will be a quarter of the way through his first term.
The first story was by Stuff’s Hamish Rutherford, and centred on the Governor’s plan to require banks to greatly increase the share of their assets funded by equity rather than debt. In the on-line version of the story, Orr is labelled “Mr Congeniality”. The story begins this way
Since Adrian Orr became Governor of the Reserve Bank of New Zealand he has built a reputation of being someone who likes to be liked.
Charming and jocular, but possibly sensitive to criticism.
But Orr is now in a battle with the bulk of New Zealand’s banking sector in a way which could see him demonised, probably with the focus on lending to farmers.
He knows it. Recent days have seen Orr on a campaign to explain itself.
I’m not sure he seems any different as Governor than he ever was before – his well-known strengths and weaknesses have continued to be on display.
I’ve written quite a lot here about the substance and process around the Bank’s capital proposals – starting with the apparent lack of consultation and coordination with APRA, through to the weaknesses of many of the arguments the Bank advances, the lack of apparent understanding of how financial crises come to occur, the grudging and gradual release of further supporting material, and (presumably partly as a result) two extensions to the deadline for submissions.
In the article Orr is quoted thus, in perhaps the understatement of the week
The consultation process, in Orr’s words “could have been tidier”.
Done properly there would have been extensive workshopping of the technical material over months before the Governor ever put his name to a specific proposal. As it is, we have a half-baked proposals, not benefiting from any prior scrutiny, and yet the same Governor who put the proposal forward is now judge and jury in his own case, with no effective rights of appeal for anyone. And there is big money involved – not just the additional capital that might need to be raised, but probable losses in economic output that will affect us all to a greater or lesser extent.
Presumably no one in the industry would go on record for Rutherford’s article. Not upsetting prickly Governors is an art the banks have sought to master (even when it involved pandering to an earlier Governor who wanted a senior bank economist censored), although presumably the banks’ submissions will be fairly forthright. (But will the public ever see those submissions?)
But some of the tone of the off-the-record concern is there in the article
Sources across several of the major banks are warning that if the bank pushes ahead with its plan it could act as a significant constraint on lending to farmers and small businesses, sectors which are as economically important as they are politically sensitive
Both sectors are considered risky and when capital requirements go up the impact will be magnified.
Why those sectors? Well, the “big end of town” (Fonterra, Air New Zealand or whoever) will have no difficulty raising debt either directly (bond market) or from banks that aren’t subject to the Reserve Bank’s capital requirements (which means every other bank in the world not operating here, as well as the parents of the locally-incorporated banks operating here). And the residential mortgage market is both pretty competitive (including from some local institutional players that are less badly hit by the Governor’s proposals than the big banks), and more open to the possibilities of securitisation (which would then avoid the capital requirements too). Idiosyncratic small and medium loans (including farm loans) aren’t, and farm loans in particular require a level of industry knowledge that newcomers won’t acquire easily (and offshore parents often won’t have).
Perhaps these effects will be large, perhaps they will be quite moderate in the end. But the point Rutherford didn’t make, but could have, is that none of this was analysed in the Bank’s consultative document. When a really major change is proposed we should surely expect a serious analysis of transitional paths (not just for the banks, but for customers and the economy) as well as the long run. But there was almost nothing, and nothing in any more depth has emerged in subsequent material that has seeped out.
It simply isn’t a good policy process, and that should concern both the Minister of Finance (and his advisers at The Treasury) and the Bank’s board. The Governor simply isn’t doing a good job on this front. If there is a compelling case for what he proposes, he hasn’t made it. And that is almost as bad – in a serious independent regulator – as not having a good case in the first place.
The second article was by the news agency Reuters. The focus in that article is Orr’s conduct of monetary policy, and particular his policy communications (which many had expected to be one of his strengths).
There are at least two strands to the article. There are criticisms of Orr for not yet having given a single substantive on-the-record speech on either of his main areas of policy responsibility (monetary policy and financial regulation). I’m among those quoted
Michael Reddell, an ex-RBNZ official who served with Orr on its monetary policy committee in the 1990s and 2000s, is critical of Orr for not giving a “substantive” speech on monetary policy in the past year.
“It would be unthinkable in Australia or the United States or even under previous governors here.”
I’ve been more and more surprised at the omission as time went on. And in respect of monetary policy it is not as if there has been much from his offsiders either. Sure, we get the rather formulaic paint-by-numbers Monetary Policy Statement every few months, but it simply isn’t the same as a thoughtful carefully-developed speech – which shows more of how the individual/institution is thinking, and the omission has been particularly significant given that we had a new Governor and a refined mandate.
Orr’s response to this criticism is reportedly that it is “thin”. Whatever that means, the fact remains that in other countries top central bankers talk, quite frequently, about their thinking in on-the-record speeches. I’ve suggested, speculatively, that perhaps he doesn’t do serious speeches on core areas of responsibility because he just isn’t that interested (saving his passion for infrastructure, climate change, diversity, and all manner of other stuff he has little or no responsibility for). I’d like to be wrong on that, but nothing in this article provides any countervailing evidence.
But the bigger criticism in the Reuters article appears to come from financial market participants, concerned that they aren’t able to read the Governor’s policy intentions well.
Many traders who spoke to Reuters in the past two weeks blame Orr for confusing the message, and some have even been critical of frequent references to legends of the indigenous Maori people in his speeches, saying they served little purpose for financial markets eager for more policy clues.
“I am extremely frustrated at the lack of communications for global market participants,” said Annette Beacher, Singapore-based macro-strategist for TD Securities.
“Since Adrian Orr has assumed the role, he’s managed to surprise the market every six weeks. We don’t hear anything from him in between policy decisions,” Beacher said, echoing similar complaints from others.
“So what do I recommend to my trading desk? I’m saying trade the data but we’re not quite sure what is going to happen at the next meeting. It’s not meant to be this way.”
Here, to be honest, I’m not sure quite what to make of the criticism (I mostly don’t hang out with international markets people). I’m sure there is a great deal of eye-rolling at the tree god nonsense that Orr continues to champion, but perhaps here the longstanding central banker in me comes out and I wonder if the offshore market people aren’t being a little precious. Markets should not need their hands held to anything like the extent some of the comments in the article suggest, and if there is a little noise in market prices as a result that isn’t necessarily a bad thing.
It seems that quite a few people the journalists talked to were grumpy about the move to an explicit easing bias at the last OCR review, I couldn’t help wondering how much of that was a disagreement with the Governor’s stance (market economists on average have been more hawkish than the Bank for years, and have been more wrong) and how much a sense that a forthcoming change hadn’t been signalled. I was bit (pleasantly) surprised myself by the move to an easing bias, but mostly because I thought the Governor wouldn’t want to launch a change of direction days before the new MPC took over. Perhaps that is one of the circumstances in which advance signalling might have been appropriate? And perhaps the two strands of concern come together here: we shouldn’t have the Governor or senior staff giving private previews to select contacts about their evolving thinking. So it has to be serious interviews or serious speeches – and, as Annette Beacher notes, we haven’t really had either.
The Bank has probably also suffered somewhat from being in transition. At the start of last year, they lost the ultimate safe pair of hands, longserving Deputy Governor Grant Spencer. A new top-team took over, and within a few months Orr was restructuring, which included demoting longserving chief economist John McDermott. He lingered for a few months before leaving entirely, but can’t have been entirely engaged. The head of financial markets was also ousted, and it was only in late March that the new recruits started to take office. As I’ve noted previously, on the monetary policy side of the Bank it is very much a case now of a Second XI at play (internals and externals) and there is now quite a challenge in getting communications onto a steady, sustainable, and functional path. The goal shouldn’t be keeping overseas economists happy, but it is perhaps telling that Reuters couldn’t find a domestic one willing to go on the record defending the Orr approach.
What of the Governor’s response to all this? I’ve already recorded his response to the concern about speeches. Here is some of the rest of what he told Reuters
In an interview with Reuters earlier on Tuesday, Orr said he wants to reach out to a wider audience than just currency traders, analysts and bloggers.
“The broad audience for this bank is the public of New Zealand. We are seen as a trusted institution but they don’t know what we do. So that is my communication challenge,” he said.
Orr also defended the Maori references in his speeches as part of the bank’s efforts to reach out to wider groups.
“Metaphors have their limits and metaphors can be over used. I get all that, but metaphors need to be introduced and created sometimes.”
I quite get that he wants to communicate to people beyond just the likes of Annette Beacher or me. But it is not much short of populism to pretend that the audience of people who do pay close attention to the Bank, and know something about it and other central banks (and can even think through the aptness or otherwise of his metaphors), don’t matter. He can try to appeal over the head of the relatively knowledgable all he likes, but I suspect he won’t find many listening. Most people have better – more interesting and important to them – things to do with their lives. As it happens, the Governor released a while ago a record of which audiences he delivered speeches to last year, and despite all the rhetoric – tree god and all – I was a bit surprised by how relatively few and conventional the audiences were. The only novelty seemed to be a lot of mention of the tree god – cue to eyes rolling from many of the audiences no doubt. How many more readers, I wonder, have the cartoon versions of the MPS and FSRs won? How many have tried twice?
There is a “retail communication” dimension to the Reserve Bank’s role – when you are driving interest rate up (or down) and affecting people’s employment prospects, business profitability etc, you have to explain yourself. Over 30 years of an independent Reserve Bank, successive Governors have done a great deal of it – Don Brash almost to the point of exhaustion, in his nationwide roadshows. But the core of the job is actually rather more “wholesale” in nature. And the Governor doesn’t seem to have been getting that right – at all re bank capital, and in some dimensions re monetary policy (I’m probably closer to his bottom line on the OCR than many other commentators). All this should be a concern for the Minister of Finance, and for the Bank’s Board.
There is still time for the Governor to right the ship – and perhaps the new MPC will end up helping – but the signs aren’t good. Only this morning, a press release emerged from the Bank championing the cause of climate change. Action may well be really important, but it just isn’t the core business – or really any business at all in a New Zealand context, with the sort of loan book New Zealand banks have – of the Reserve Bank. It is what we have an elected government for.
Sadly, we can expect to hear more from the Governor on climate change and his tree god (flawed) metaphor, and there is no sign of any contrition around the lack of serious communication from him on monetary policy or (where he is still sole decisionmaker) financial sector regulation.