New Zealand and Australia

Yesterday’s post unpicked some of Reserve Bank Deputy Governor Geoff Bascand’s speech in Sydney earlier this week.  As I noted, the goal of the speech seemed to be to leave readers with a sense that there really were good grounds for New Zealand to impose materially more onerous core capital ratios on locally-incorporated banks (recall that none of these requirements apply to any other lenders, banks or otherwise) than those imposed in Australia.   The gist of the case was, we were told

Our conservatism, relative to Australia, in our bank capital proposals reflects the higher macroeconomic volatility that we have endured, as I pointed out earlier.

Even over the nearly 30 years Bascand asked us to focus on, this wasn’t a very convincing argument.

As I pondered further the claim that New Zealand was exposed to materially more macroeconomic volality than Australia –  and the differences have to be “material” to support the material differences in proposed core capital requirements –  and conscious of the huge and wrenching Australian crisis of the 1890s, I’d just decided to look at a rather longer run of data when a reader, an academic economist, sent me an email making exactly the same point, and conveniently drawing my attention to this chart (from the Phil Briggs NZIER compilation of charts and text in New Zealand economic history).


It uses smoothed data because the estimates for the earlier decades, for both countries, are incredibly noisy.

But, if anything, over that 150 years, the Australian experience was more volatile than that of New Zealand.    Their financial crisis was much more severe than ours in the 1890s, and their experience of the Great Depression (including in the financial sector) is generally regarded as having been worse than ours, as examples.

You’ll recall that the Governor has chosen to attempt to calibrate his capital requirements so that, in principle, New Zealand experiences a financial (banking) crisis no more than once in 200 years.  We don’t have 200 years (of data, or experience) for New Zealand –  although the Australian data start from 1820 –  but if you want to mount arguments that we are (and will be) exposed to materially higher macro volatility than another country, it surely is only reasonable to look at as long a history of those two countries as one can reasonably get.  Unless, that is, one is using statistics/history for support –  for the boss’s whims –  rather than for illumination.

One can always discount history –  this, that or the other thing will always have been different, even if human nature isn’t –  but to mount a major policy case on a carefully chosen subset of history seems more akin to propaganda than to good policy process.

Or here is another chart.  Bascand included in his speech a chart on New Zealand GDP since 1965.   Here are the unemployment rates for the two countries since 1966 –  the official Australia data starts then and our series was backdated (from when the HLFS started in 1986) by Simon Chapple.  Not 200 years of data, but more than 50.

U rates long-term

Do those look like two economies prone to materially differing degrees of macroeconomic volaility?  If anything, Australia might have been a bit more volatile (over this particular period).  Peak unemployment rates in Australia in the Great Depression also appear to have been higher than those in New Zealand.

But I don’t want to mount an argument that Australia is more exposed to macroeconomic volatility than New Zealand is.   If anything, rather the contrary.  Over long periods, New Zealand and Australia have been two of the more similar countries on earth.  The modern countries emerged at much the same time, for almost all their histories they’ve had much the same exchange rate regimes, they’ve had strongly overlapping banking systems, they’ve been heavily dependent on foreign capital (especially in the development phase), they liberalised again at much the same time, they both run public debt sky high at much the same times, they both turned fairly inwards for a time, they’ve had pretty similar migration policies, they’ve mostly had very similar terms of trade cycles, and they’ve both had the rule of law (and similar legal systems) and democratic government throughout their modern histories.  They’ve been tolerably well-governed, tolerably successful in economic terms (Australia more than us in recent decades), with a high degree of financial stability in both countries for now well over 100 years –  with the sole exception of the brief period of shared craziness immediately after the 1980s liberalisation when no one (regulators, lenders or borrowers) really knew quite what they were doing.

2025 TOT

So if Adrian Orr and Geoff Bascand really want to mount a case for putting much more onerous capital requirements on in New Zealand than in Australia, it is simply absurd and untenable to  mount it on the basis of some intrinsic greater level of economic risk in New Zealand than in Australia.  It hasn’t been so in history, and they’ve not even sought to advance an argument for why it might be so in future.

Perhaps the Australians really have it wrong and superior wisdom rests with Messrs Orr and Bascand.  But, frankly, it seems unlikely.  Not only are the key Australian officials much more experienced in these matters than ours, and they have the additional worry that there is no prospect of parental support for their banks, but it is the New Zealand proposals which appear to put us out of line with (above) international benchmarks, despite the impressive long-term track record of financial stability here, the floating exchange rate regime, and a now well-established history of keeping governments out of credit allocation.

More generally, in banking systems that have so much in common, in economies with so much in common, surely we should have looked to our authorities to have worked closely with the Australians to have developed as common a regime as possible, recognising (inter alia) that if and when anything really goes wrong with any of the big 4 the problems will be trans-Tasman in nature and are likely to be resolved –  and be best resolved –  at a trans-Tasman political level.    I’m not suggesting Australian officials and politicians have our best interests at heart.  Both sides need to look after their own national interests, but those interests can be protected –  probably better protected –  by working closely together, on as common a framework as possibly, consistent with maintaining/pursuing an unquestionably strong banking and financial system.

As for New Zealand citizens and voters, we really should be demanding much higher standards from our top central bankers, who seem unable or unwilling to answer simple questions and challenges about what the Governor is proposing, or to do so in ways that are straightforward and reasonably defensible  That really should worry Grant Robertson, who is responsible for these men and for the institution.