Orr on bank capital

I’ll no doubt have more to say about Radio New Zealand’s Insight documentary on the Reserve Bank Governor’s proposed bank capital reforms after the full programme has run, but Morning Report this morning ran a fairly lengthy piece on the issue, including meaty quotes from the Governor (and some from me and from the former Secretary to the Treasury, Graham Scott, who was involved in the Bankers’ Association submissions on the Governor’s “proposal”).  Even what I heard of that RNZ story was pretty extraordinary in several areas.

First, as if to confirm that the “proposal” wasn’t a serious consultation, the Governor confirmed that capital requirements will be rising, no question about that.  Perhaps he is genuine that he hasn’t quite decided whether he thinks his own proposal is perfect in all its details –  I was pleased RNZ got in my line that he is prosecutor, judge and jury in his own case, with no effective right of appeal – but there was little sign he is interested in alternative perspectives, arguments, or evidence.  And thus remains true to form.

Perhaps more extraordinary –  given his specific statutory role, not a constraint that ever seems to bother him –  was the assertion that Australian banks make “too much money” in New Zealand.  I suppose as a citizen he is entitled to his prejudice, but as Governor of the Reserve Bank how much private businesses make is really none of his business. His job is prudential regulator –  ie safety and soundness of the system –  not about competition, rates of return or the like.  We have, or could have, competition law and associated institutions to deal with those issues.  For all the Governor’s talk about super-profits, if it were really true you’d have to wonder why bank assets in New Zealand weren’t growing very rapidly, and new entrants flocking in, credit abundant to anyone who asks, to take advantage of this extraordinarily profitable corner of the world.  And in feeding the angst in some circles about Australian bank profits, perhaps he might point out that if his proposals are adopted it is likely that total profits earned by Australian banks in New Zealand will rise, not fall (rates of return are likely to fall a bit, but there will be a lot more capital in the banks –  unless the Governor’s proposal really backfires).

On which note, it was extraordinary to hear the Governor suggest that if the Australian banks didn’t like his new regime, well they could just take their money and go elsewhere.  He wasn’t going to be bothered.   This about banks that in some cases have been here, steadily, almost as long as modern New Zealand has.   This from as Governor whose own consultation document never seriously discussed transitions or adjustment paths (in aggregate or specific sectors) to his proposed much higher capital ratios.  The Bank has all year tended to be pretty dismissive of any suggestions that the availability of credit might be adversely affected, and they’ve still provided no supporting analysis.  Nine months ago when they launched the Governor’s radical scheme, they thought the economy didn’t look too bad.  Since then they’ve had to cut the OCR by 75 points, with more cuts to come (on almost everyone’s reckoning) even before allowing for any effects of these capital proposals.  Perhaps then a rash Governor could afford to be cavalier about bank capital, but it borders on the outright irresponsible for him to take that stance now –  with so little conventional monetary policy leeway left, in a world looking more difficult almost by the day.   Reduced credit availability, to the extent it happens, will only exacerbate any downturn, and the effects are likely to be concentrated in those sectors least readily able to tap alternative credit (hint: not big corporates, not household mortgages, but eg farms and small businesses). But, of course, thanks to the government’s indifference there are no effective checks and balances on the Governor following his whim, in some sort of Orr-tarchy.

And finally on this topic for today, there was the line the Governor ran about how he had to do this to end the practice of the public subsidising banks.  He went on to suggest that we forget too easily all the banking failures and near-misses.  But with no a shred of evidence –  in any of his documents –  to support any of this.  The New Zealand banking system has gone for 125 years without any serious crisis, except for the one 30 years when the ensnaring complex of extensive regulation was pulled away quickly and neither banks, borrowers, nor central bankers really knew what they were doing. The Australian banking system is the same.  The Canadian banking system even more so.   The Governor’s own stress tests have repeatedly supported the view – taken by the Bank over many years, supported by the IMF –  that the New Zealand banking system is strong and well-capitalised.  The Governor likes to play on 2008, muddying the water with talk of near-crises here: he should know very well that there were no major credit losses here, and the (real) liquidity issues were global in nature, and would not have been one jot different if banks had had twice the (then untroubling) level of capital they had.

It is a worry that so much power is held by one individual.   It should be concerning even if we had the most thoughtful, considered, consultative, and judicious person in the role.  In fact, we have Adrian Orr, to whom none of those descriptions can reasonably be applied.   And there seems to be a vacuum where there should be a government taking leadership responsibility (in fact, one can imagine Shane Jones –  “consulting the Cabinet Manual” on his holiday –  cheering Orr on).


3 thoughts on “Orr on bank capital

  1. You are correct to point out that profitability is not an issue for the prudential regulator. Orr should ask for a pay rise, and ask the commerce commission to be disbanded.

    Also weird is that Orr worries about banks – but what about insurance companies who display lots of poor behavior. And yet – FMA & RBNZ only show their disappointment and then return to business as usual.

    Liked by 1 person

  2. Michael, one could presume Governor Orr is running a risk that a or the banks could ask for a Judicial Review of his decision(s) once made – firstly, that his decision(s) to increase bank capital because the “banks are making too much money” is ultra vires.

    If a bank is advised that a Judicial Review is a viable option and decides to take him on – and it is unquestioned they do have the resources (and incentives) to mount a case – a loss or blood nose to Orr would not be a good outcome for him and dare I say to the wider conversation.

    Orr may have significant powers in respect of the prudential management of the banking system – his powers are not sufficiently developed that he can grant himself new powers not provided by statute or regulation.


    • I wouldn’t expect there to be a judicial review. The banks have historically been v reluctant to challenge their regulator in public (particularly in Aus, but any judicial review sought would be authorised from the parents), and as understand the law any challenge could only be on whether appropriate process had been followed. The dodgy argument about bank profits does not appear in any of the formal consultative documents so I’d expect the Bank to be able to mount a semi-convincing defence that (a) their grounds weren’t ultra vires, and (b) they had engaged in proper consultative process without pre-determination. Given the deference courts seem to have given regulators I’d have thought any case wouldn’t have much chance. Add that to reluctance to even try and you are left with my conclusion “with no effective scope for appeal”. Even if a judicial review did succeed, I imagine all that would happen is that the Bank would be told to start the clock again, and be more careful to jump thru the appropriate process hurdles next time.

      I’m not a lawyer, of course.

      Liked by 2 people

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