Submitting on bank capital proposals

It probably isn’t a great look for a powerful government agency, avowing its desire to hear from anyone and everyone on its radical proposals, to have its spam filters set so that a vocal critic’s submission couldn’t be received (that was my experience last night).  But I did get a friendly response when I enquired what was going on, and no doubt they will get it sorted out today.

My submission is here

Submission to RBNZ minimum capital ratios consultation 15 May 2019

The Governor’s consultation document was released in December. It was the culmination of a review of aspects of the bank capital framework that had been underway for several years, but as the documents the Bank subsequently released made clear, much about the central proposal –  the large increase in minimum core capital ratios – had come together only at the last minute, none of the supporting analysis had been critically reviewed before the Governor adopted it as his cause, and the analysis started weak and never really improved.  No decent analysis has ever been presented about the transitional effects, including distributional effects and possible changes in the structure of the financial system.

In a mark of all that is wrong with the governance of financial regulatory functions in New Zealand, having signed on to the cause of much higher capital ratios, the Governor will now be judge and jury in a case he himself is prosecuting.  And there are no rights of appeal.   Good government has to mean something better than this.

The Reserve Bank’s December 2018 consultative document proposed three main changes:

·       Much higher minimum ratios of capital (CET1) to risk-weighted assets than previously,

·       Higher minimum capital ratios for systemically-significant banks than for other locally-incorporated banks, and

·       A significant narrowing in the gap between the calculation of risk-weighted assets as between the big banks using internal models and the remaining locally-incorporated banks using the standardised approach.

In my submission I supported the third of these proposals (which itself would be expected to lead to a reasonably significant increase in capital for the big banks) and opposed the other two.   Higher capital ratios for similarly-risky large banks might make some sense if the minimum requirements were themselves modest, but they aren’t (and rating agencies generally reckon that our larger banks are safer than the small ones –  which makes sense for various reasons, including the strong parents who own the larger banks).

The focus of the submission was on the proposal to increase substantially the minimum core (CET1) capital ratios.  Combined with the higher floor proposed for calculating risk-weighted assets, this proposal would –  it appear, but we could never be sure because no serious benchmarking was presented –  have made New Zealand regulatory minima among the very highest in the world.  No case was made in the consultation document for why that was appropriate, including why it was appropriate for New Zealand requirements to be so much more demanding than those in Australia.

Most of the material in the submission has probably already been covered in a succession of posts here over recent months, but here it is in summary form.

I started by noting that there seemed, at best, a scant prima facie for further large increases in minimum capital requirements.

Relevant context

An unbiased observer, looking at the New Zealand economy and financial system, would struggle to find a case for higher minimum capital ratios.   Among the factors such an observer might consider would be:

  • The fact that the New Zealand financial system has not experienced a systemic financial crisis for more than hundred years (and to the extent it approximated one in the late 1980s, that was in the idiosyncratic circumstances of an extensive and fast financial liberalisation which left neither market participants nor regulators particularly well-equipped),
  • Our major banks – the only ones that might pose any serious economywide risks – come from a country with very much the same historical record as New Zealand,
  • Despite very rapid credit growth in the years prior to 2008 (increases in the credit to GDP ratios among the larger in the advanced world, spread across housing, farm, and other business/property lending), and a severe recession in 2008/09 and afterwards, the banking system emerged with low loan losses,
  • Since then, banks have not only increased their actual capital ratios (and been required to calculate farm risk-weighted assets more stringently) but have also substantially improved their funding and liquidity positions (under some mix of regulatory and market pressure).
  • Over the decade, bank credit growth (relative to GDP) has been pretty subdued and there has been little or no evidence (in, for example, Reserve Bank FSRs) of any serious degradation of lending standards.
  • The balance sheets of the large banks remain relatively simple, and there has been no sign (per FSRs) of the sort of financial innovation that might raise significant doubts about the adequacy of existing models.
  • In terms of the wider policy environment, government fiscal policy remains very strong, we continue to have a freely-floating exchange rate, and there has been neither legislation nor judicial rulings that will have materially impaired the ability of banks to realise collateral.
  • And the Open Bank Resolution option for bank resolution has been more firmly established in the official toolkit (note that if OBR were fully credible then, in the absence of deposit insurance, there would be little case for regulatory minimum capital requirements at all).
  • And repeated stress tests – over a period when the regulator had no incentive to skew the tests to show favourable results –  suggested that even if exposed to extremely severe adverse macro shocks, and associated large price adjustments for houses, farms, and commercial property, not only would no bank fail, but no bank would even drop below current minimum capital requirements.
  • Consistent with this experience – also observed in Australia, the home jurisdiction of the parents of our major banks – the major banks operating here continue to have strong credit ratings (consistent with a very low probability of default), and the ratings of the parent banks are even higher.
  • There has been no change in the ownership structure of our major banks, or in the implied willingness of the Australian authorities to support the (systemically significant) parents of the New Zealand banks were they ever to get into difficulty.

Add into the mix indications that New Zealand banks CET1 ratios, if calculated on a properly comparable basis, would already be among the highest in the advanced world –  in a macro environment with more scope for stabilisation (floating exchange rate, strong fiscal position, little unhedged foreign currency lending) than in many advanced countries –  and there would be a fairly strong prima facie case for leaving things much as they are.

But the Reserve Bank’s consultative document – and associated material, including speeches and interviews – engages substantively with almost none of this context.

There is little evidence the Bank has thought hard about financial crises.

…there is a strong (implicit) tendency in the document to treat financial crises as exogenous shocks, events arising out of the blue, which a decently-managed bank (or financial system) will face every once in a while, (be it once a century, or two).     But a moment’s reflection is all it should take to realise that that is simply the wrong approach to be using (especially when, as in this consultation, you are talking of proposals designed to reduce already-low risks to extremely low levels).     You could look at the Irish crisis, the Icelandic one, the US crisis, the Korean crisis of the 1990s, the Nordic crises of the early 1990s (and even the New Zealand and Australian experiences in the late 80s and early 90s) to appreciate that the system-threatening problems didn’t arise from exogenous shocks, but from several years of very degraded lending standards.     Exogenous shocks may have played some part in determining the timing and nature of the crystallisation of the problems, but they weren’t what determined that there would be a costly re-adjustment at some point.  If the Bank believes differently, the onus should have been on it to make its case.  There was no sign of such a case in the consultation document. 

Linked to this point, there is very little recognition (none in the main document, and very little in subsequent papers) that many or most of the output losses associated (in time) with financial crises have to do with the misallocation of resources (bad lending, bad borrowing, bad investing) in the preceding boom years.  Your documents recognise that one cannot simply measure output losses from a pre-crisis peak (typically a period with a positive output gap) but do not go anywhere near far enough to recognise the significance of this, rather larger, point. In such circumstances, estimates of potential GDP itself may be materially overstated.  As far as I can tell, the research papers you quote are open to the same criticism (which is not a defence for the Bank, but – probably – an indication of the predispositions of many of the chosen researchers and their institutional sponsors).

When an economy and financial system has gone through several years of badly misdirected lending, borrowing, and investment, not only is there an inevitability about output losses because of the bad prior choices crystallising, but there is a near-inevitability about both lenders and borrowers being hesitant about doing new business in the wake of the realisation of past mistakes.  Prior assumptions and business models prove invalid, and it takes time for risk appetite to revive, and to identify like projects that would prove profitable.  That is likely to be so whether or not banks emerge from the crystallisation phase with ample levels of capital.       At best, it is only the marginal additional output losses from banks falling into “crisis” (however defined) that is likely to be eased by much higher initial capital ratios – and yet you made no attempt to distinguish this effect.

The Bank has made no effort to provide a proper cost-benefit analysis, with key assumptions and sensitivities documented, but even what on has been presented the numbers just don’t seem to add up.

In his speech in February, the Deputy Governor indicated that the Bank’s own analysis suggested that the output cost of the proposed higher capital ratios would be “up to 0.3 per cent” of the level of GDP.  In other words, the annual insurance premium society would pay – even on your assumptions – might be 0.25 per cent of GDP.  As you note, the standard Treasury discount rate is a bit larger than what is used in many of the papers you cite, and applying such a discount rate to this expected annual cost gives a present value of lost output of perhaps $15 billion.    That is a high hurdle to get over when the gain on offer is the reduced (from already low levels) probability of output losses resulting (narrowly) from a financial crisis expected in, on average, 75 or 100 years’ time (your claim is that you want to keep the probability of crisis to no more than once in 200 years).   On plausible estimates of those marginal additional output loss savings, the cost-benefit simply would not stack up.  (And as Ian Harrison notes, none of these numbers appear to take account of the income loss to New Zealanders from imposing higher capital requirements on – and thus requiring higher expected equity returns to shareholders of – foreign-owned banks.)

There has been no attempt to adequately benchmark the Bank’s proposals against those of other regulators, and no sign that the Bank engaged closely with APRA in bringing them together.

It is grossly unsatisfactory that throughout months of consultation the Bank has made no effort to illustrate how its proposals for minimum CET1 ratios and the associated floors around the calculation of risk-weighted assets, compare with those planned by APRA for the Australian banks.

Such an exercise should have been relatively straightforward, especially if the Reserve Bank had done what most New Zealanders might reasonably have expected, and worked closely together with APRA in formulating its proposals.  Of course, New Zealand is a sovereign nation and the Reserve Bank (regrettably) has final decision-making powers in New Zealand but:

·       APRA has a considerably deeper pool of expertise, including at the top of the organisation, than the Reserve Bank of New Zealand,

·       The nature of the risks in the two economies and markets is quite similar (including similar legal institutions, and similar housing markets),

·       If anything there is a case for thinking that APRA minima would be ceilings below which New Zealand requirements for our large banks should be set (since we have the benefit of strong parent banks, and well-regarded supervisor of those banks, whereas the parents  – and parents’ supervisors – themselves are on their own, and we have also chosen to have the OBR as a frontline resolution option),

·       For the institutions that might pose potential systemic issues in New Zealand, any substantial increase in capital requirements can reasonably be seen as an attempt to grab group capital for New Zealand.  Why not work these things out together?

The onus should, surely, be on the Reserve Bank of New Zealand to demonstrate – make the case in detail – why the New Zealand subsidiaries of Australian banks should be subject to more onerous capital requirements than the parents, and banking groups as a whole, are subject to.  But not once has the Reserve Bank attempted to make that case.

The arms-length (or worse) approach re APRA seems hardly consistent with the spirit of the trans-Tasman banking regulatory accords that were reflected in the legislation of both countries some years ago, even recognising that New Zealand interests are not always identical to those of Australia.

And there has been no analysis published on the transitional effects, the distributional effects, whether any disintermediation might worsen the soundness and efficiency of the financial system.

The only estimates we’ve seen have been those for possible changes in lending margins for institutions affected by the proposed higher capital ratios. There has been no serious analysis published of the extent to which banks might become less willing to lend. And there has been no discussion about the extent to which business may migrate from regulated banks to either unregulated (i.e. not locally incorporated) banks here or abroad, or to finance companies, or of the possibility of disintermediation (such that more of society’s demand for credit is met without the direct interposition of a financial institution’s balance sheet). There has been no analysis of which economic sectors might be most severely affected. Large corporates for example will have plenty of alternative providers, probably at a price very similar to what they pay now, and many housing mortgages could be relatively easily securitised if necessary, but SMEs and rural borrowers might be more likely to bear the brunt of any price or capacity adjustment. Similarly, there was no analysis of where the brunt of any adjustment to deposit and wholesale funding interest rates might fall, but it seems reasonable to posit that wholesale creditors will not bear most of the burden.

Perhaps more concerningly still, there is no sign of any analysis of whether a financial system in which more business has gravitated to institutions not locally-incorporated or to disintermediated markets would be (a) sounder, and (b) more efficient. There is a risk that the core banks (already low risk) become somewhat safer, but that those institutions in future have a diminished role in the system. Most of the Bank’s analysis appears to, in effect, treat locally incorporated banks as the sum of the financial system, which is less likely to be the case in future if these proposals proceed. Failure to address these issues does not instill confidence.

And

… there was no discussion at all of the macroeconomic context in which these proposals would take effect. The proposals involved a transition over five years. Nine years into an economic recovery, with slowing domestic growth and growing global risks there has to be a fairly significant chance that the next significant recession will occur in the next five years (i.e. during the proposed transition period). That means a significant risk that regulatory policy would be exacerbating any downturn (through tighter credit constraints, reduced credit appetite, and potential higher pricing), in a downturn in which monetary policy is likely to be hard up against conventional limits (the Bank’s own analysis has suggested the OCR might be able to be cut only to around -0.75 per cent). Of course, if bank balance sheets were looking shaky it would be prudent to move ahead anyway – better ten years ago, but if not then now – but nothing in the Bank’s published analysis (past FSRs, stress tests, consultation document) nor in the credit ratings of the relevant institutions suggests anything like that sort of vulnerability. Without it, you will – with a reasonable probability – make economic management over the next few years more difficult (additional upfront potential economic costs), in exchange for the modest probability of making any real difference to (already very low) financial system risks over that period. It isn’t a trade-off that appears to be worth making – at least not without much more supporting analysis than we have had to date.

I also commented briefly on the signs of anti-Australianism that have emerged from senior Bank managers

We’ve also seen it in rather glib comments that perhaps the Australian banks might sell down their stakes in their New Zealand subsidiaries, in a tone which implies that Reserve Bank senior managers think this might be quite a good thing.    Anti-Australianism is a recurring theme in New Zealand political debate around banks, but it should have no place in the assessments or public comments of officials operating under the Reserve Bank of New Zealand Act.

In my view, New Zealand benefits considerably – in terms of financial system soundness and efficiency – from the fact that the major banks are all part of much larger banking groups, each headquartered in a friendly country with good institutions, and strong record of financial stability.   The Reserve Bank should not lightly jeopardise that situation with proposals that simply aren’t backed by robust analysis of the risks they are supposed to mitigate or of the costs of adjustment.

Before concluding

Serious recessions are things to seek to mitigate.  That is primarily the role of discretionary monetary policy, made possible by a floating exchange rate.  Serious misallocations of resources are likely to be costly, but the misallocations arise in the good times – when credit is growing strongly – not in the subsequent bust.  The marginal additional losses arising from financial crises themselves appear to be (typically) small, and these proposals in any case involve only a further modest reduction in an already low risk of serious problems (in a country with little history of serious systemic financial problems).  

There are limits to what any regulators and officials can do about initial misallocations, but my recommendation to the Bank would be to abandon the push for higher minimum capital ratios (while proceeding to level the playing field between advanced and standardised model banks) and to focus its energies instead on sharpening its ability to recognise, and respond vigorously to, any sharp deteriorations in lending standards promptly when and if they get underway.  Complement that with robust championing of  (a) the importance of the floating exchange rate regime –  especially in a country with neutral interest rates higher than the rest of the world –  and (b) of keeping the government out of the business of directing credit and, together with existing demanding capital standards, you are likely to best serve the interests of New Zealanders.  Better that approach than the (probably costly) steep increases in capital requirements proposed in the consultation document without anything like adequate, carefully and independently scrutinised, supporting analysis.    New Zealanders deserve better than they have had in the poor process and weak substance that together made up this consultation.

We can only hope that the Reserve Bank will be proactive and publish all the submissions shortly, not wait (as they often do) until the Governor has retreated to his high castle and contemplated for months.

There have been all sorts of unsatisfactory aspects to the process around this consultation.   There was no good reason why extensive socialisation, and testing, of the Bank’s analytical material –  such as it is –  could not have been undertaken well before the Governor signed up to one particular option.  In a system where the Governor is also the final decisionmaker, with no rights of appeal, that would have been even more useful and appropriate.  When they did publish the consultative document, they should have all the supporting material already available and published simultaneously, not released (as it was written) over several months subsequently.   And the quality of the material they have put out –  whether or not one agrees with the proposed bottom line –  just isn’t up to scratch.

That is the Governor’s responsibility, personally (although his Deputy, the Head of Financial Stability, presumably shares a lot of responsibility).   The Bank’s Board exists largely to hold the Governor to account, on behalf of the public and the Minister of Finance.  They really should be asking hard questions already about the substance and (in particular) the process, and insisting on a proper ex post review, including (for example) a survey of submitters and other stakeholders.   Early last year the New Zealand Initiative published a major report highlighting how poorly the Bank was regarded as a financial regulator.  Perhaps the particular failings that concerned people have changed a little in the transition from Wheeler to Orr, but it is difficult to believe that the Bank is any more highly regarded as a regulator now than it was then, and all the structural weaknesses –  which underpin the cultural problems – are still as they much as they were: too much power rests with a single individual, with little effective accountability.   It isn’t helped by the fact that neither of the key senior individuals has a strong background in financial stability or regulation.   New Zealanders deserve better.

 

 

Bank capital again

Just a quick post today, as submissions close soon on the Reserve Bank Governor’s plans to require banks to fund much more of their balance sheets with equity capital, and I still need to write mine.  The Governor stated last week that the Bank has already received 50 or so submissions.  I hope that, in the spirit of open government and genuine consultation, the Bank will put those submissions up on their website pretty promptly –  and not, as is more usually the case with them (but not, say, with parliamentary select committees), only when the Governor has made his final decision.

I’ve seen a few submissions, none of which seemed very positive on what the Governor was proposing.   It remains striking that, five months on from the release of the initial consultative document there has still been no serious attempt at a cost-benefit analysis, and only the promise that they will eventually do one –  conveniently aligning, no doubt, with the final decision the Governor makes, and too late for any challenge or scrutiny of the analysis or numbers to make any difference.   It is quite an extraordinary democratic deficit that a single unelected official, himself appointed by other unelected officials, gets to make decisions of this moment on his own whim, with no rights of appeal or review.  And the Minister of Finance sits by claiming it is none of his business.

That lack of any cost-benefit analysis is one of the central points in BusinessNZ’s submission.   I noticed interest.co.nz’s Gareth Vaughan attacking BusinessNZ for not offering support to the leg of the Reserve Bank proposal which will improve somewhat the competitive position of the small New Zealand banks (by narrowing the differences between the risk-weighted assets calculations between the big banks using internal models, and the rest using the standardised rules).   I happen to support that leg of what the Reserve Bank is proposing but –  sensible as it is –  it isn’t going to be of much benefit to anyone other than the small banks themselves, unless those banks are able to raise materially more capital themselves and take a larger share of the credit market.  As I noted in my post on this issue a couple of weeks ago

Sure the competitive position of the small banks is going to be improved, relative to what it is now, but –  as noted earlier –  only one of those smaller banks is a listed vehicle, and neither TSB, SBS, or Coop have means of raising lots more core capital without dramatically changing their ethos or ownership structure.    Perhaps Kiwibank might manage to wrangle lots more capital out of NZ Post, NZSF, and ACC….or perhaps not.  And how confident could we be that New Zealand would be better off with a very fast-growing government-owned bank, subject to few effective market disciplines.  That sort of entity has often been on a fast road to something very nasty.

The big issue around the Reserve Bank’s plans is the proposal to greatly increase minimum capital ratios, and that is the focus of comments and submissions should probably be.

I’ve devoted a couple of posts here to the sterling work of my former colleague, former RB risk modeller, Ian Harrison in reviewing in depth the succession of documents the Reserve Bank has put out over the months to try to buttress its case.   Most recently, there was this post on the lecture Ian did at Victoria University late last month (and earlier there was his paper “The 30 billion dollar whim”.

Ian has now released another paper, “Third Time Lucky?”,  in which he reviews at some length the latest paper the Reserve Bank published (last month) in support of its proposals.   That Reserve Bank paper was described to me last week by a reader with considerable experience and expertise in these and related fields as simply not up to the standard one should expect from an advanced country central bank.

The short answer to Ian’s question is no: a compelling case still hasn’t been made. In fact, when I read a near-final draft of Ian’s paper last week I found it a pretty complete –  if sometimes quite technical –  evisceration of the Bank’s work.  I get the impression that he would regard the comment about this paper not being worthy of an advanced country central bank as being unfair to other central banks: it simply isn’t up to an acceptable standard for any powerful regulatory body, much less one where decisions are made by a single unelected official.

Here are his key conclusions

1. Capital increases unnecessary.    The Bank has failed to support its case for a substantial capital increase in the information document. The best evidence and logical analysis shows reasonably strongly that increasing banks’ capital ratios will reduce welfare. We stand by our previous assessment that the costs could be very large. Estimates of the net present value costs in the tens of billions would not be alarmist.

2. Risk tolerance approach a backward step. The risk tolerance approach is not an advance in thinking about bank capital ratios. It tends to muddle the issues and can, conceptually, result in suboptimal decision making. Other supervisors have similar mandates to the Reserve Bank’s, but none have attempted to quantify it, and define ‘soundness’ in terms of the probability of a financial or banking crisis. Bank crisis is too subjective a notion to be a useful hard metric for bank capital policy. The Bank is trying to solve ‘a problem’ of its own making. On any reasonable assessment the banking system is sound. We do not need the Reserve Bank to ‘make New Zealand sound again’.

3. Modelling analysis is embarrassingly bad. There has been a corrosion of the quality of the Bank’s policy analysis. Some of the analysis of the inputs into the capital model is an embarrassment for New Zealand and a risk to the Bank’s credibility. APRA, which can understand the analytics, must be worried about the quality of the analytics decision making in an institution they may have to work with if there is a financial crisis some time in the future.

4. Bank missed a double counting in the capital requirement. The Bank missed the fact that they have already increased bank capital by 20 per cent by requiring advanced bank capital to be 90 percent of that required under the standardised approach. Even if the Bank’s analytical modeling of the optimal capital ratio was robust (which it definitely is not) it should be wound back by about a third to correct for this double counting.

5. Impact of foreign ownership continues to be ignored. The Bank has continued to ignore foreign ownership of the New Zealand banking system. It has ignored: the possibility that Australian owned subsidiaries will be sometimes supported by their parents, reducing the probability of a crisis; that there is little point in a subsidiary having a higher capital ratio than its parent; and the cost to New Zealand of increased profits to foreign owners.

6. Economic cost of crisis substantially overstated. The direct economic costs of banking crises have been grossly overstated. The Bank’s preferred estimate appears to be 63 percent of GDP. A more realistic assessment of the marginal cost of a banking crisis, for New Zealand as opposed to the underlying economic shock, would be no more than 10 percent of GDP.

7. Misrepresentation of the social costs of crises. The Bank has grossly misrepresented the literature it extensively quoted from, on the social costs and longevity of banking crises. The World Bank and the UN did not say that financial crisis have long lasting effects as the Bank claimed. The relevant message from the papers the Bank quoted from is that the social costs in any economic downturn are substantially mitigated in countries, which, like New Zealand, have robust social safety nets. We found no evidence of long lasting ‘wider social costs’ in some relevant New Zealand data. Suicide rates, divorce rates and crime rates did not deteriorate during the GFC recession.

8. Fiscal risks benefits overstated. Higher capital will have a limited impact on governments’ fiscal risks, which are already limited and manageable. Higher capital may not reduce governments’ gross fiscal costs at all if a government feels obliged to top up a banks’ capital to the new higher level after a crisis. Anything less could mean the banking system would continue to be ‘unsound’.

And from his Introduction

However, the Bank still didn’t seriously engage on the following critical issues.

• The need to adjust for the difference between New Zealand and foreign capital calculations when using foreign data on the relationship between capital and the probability of a banking crisis.

• The need to consider the use of the Open Bank Resolution (OBR) option, which is a partial substitute for capital, as part of the capital review process.

• The need to consider the impact of foreign ownership of New Zealand banks on the probability of a crisis.

• The need to take into account foreign ownership on the cost of additional capital. The Bank has only considered the impact of interest rate increases on economic output. It has ignored the fact that there will be a transfer to foreign owners because of higher lending rates/or lower deposit rates.

• The need to explain the gap between its assessment of the ‘soundness’ of the New Zealand financial system and that implied by the rating agencies’ assessments and the Basel advanced model results.

• The need to explain why the Bank now considers the New Zealand financial system is unsound, when it had determined that it was sound in fifteen years of financial stability reviews.

There is a new Financial Stability Report out in a couple of weeks.  It will be fascinating to see how the Governor has attempted to draft around that final point.

As a reminder, there is every indication that what the Bank is proposing will involve putting in place the highest effective minimum core capital ratios anywhere in the advanced world, despite a near-complete absence of supporting evidence or analysis, despite twenty years of championing the role of the OBR mechanism, and despite the complete lack of any open engagement on the question of why our Reserve Bank is so confident that it is appropriate to impose much higher core capital requirements here than those being imposed on the parents of most of the same banks in Australia.  There has been no serious benchmarking undertaken, or if it was undertaken none published.

And, of course, there has been no serious or sustained analysis of the transitional effects or the distributional effects.    Without something of that sort there is even less reason to have confidence that the Reserve Bank really understands, or perhaps cares much, about the gubernatorial whim they are pursuing.

Long-term default rates for investment grade issuers

Ages ago I signed up to get the weekly market outlook publication from the Moody’s rating agency.  I very rarely look at, but my eye was drawn to the title of this week’s edition, “Not Even the Great Depression Could Push the Baa Default Rate Above 2%”.  I’m a sucker for almost anything about the Great Depression, especially when combined with very long-run charts.

The report highlighted that there is an increasing number of credit rating downgrades for (US) high-yield (“speculative”, “risky”) corporate issuers, and that at present high-yield spreads haven’t widened to reflect that in the way one might typically expect.  But they also took the opportunity to note that there is nothing similar going on for safer corporate credits: if anything there are more upgrades than downgrades at present for Baa rated industrial companies.

A Baa rating is the Moody’s equivalent of S&P’s BBB.  Both are the lowest of the “investment grade” ratings  (all the ratings from A- to AAA are the higher investment grade ratings).  A Baa rating isn’t for a borrower that would be regarded as rock-solid, but is still a pretty good-quality credit.  A reasonable and prudent investor probably wouldn’t look askance at having some of such a credit as part of their portfolio.

And this was the chart that that Great Depression headline related to.

Baa ratings

The two recessions of the 1930s were savage (the second savage but fairly short) –  about as bad, on many metrics, as the Greek experience in the last decade.   And yet, even then, not (quite) 1 in 50 Baa-rated issuers (recall that these weren’t the most rock-solid issuers) failed (defaulted).   And over 99 years of data the average annual default rate for Baa-rated issuers was 0.3 per cent (and over the second half of that period –  including the severe 2008/09 recession – the average default rate was lower than in the first half of the period, when active counter-cyclical macro management was still a contentious novelty.)

Loosely speaking, a 0.3 per cent annual default probability could be seen as roughly equivalent to a probability that a particular Baa-rate issuer will default once in every 333 years.

Readers will recall that the Governor of the Reserve Bank plucked, pretty much from thin air (at least going by the documents they’ve released), a benchmark of requiring banks to have sufficient equity capital to cope with a 1 in 200 year event.

But how safe do the rating agencies regard our big banks at present, on the current capital ratios?    For that, you can’t just look at the headline rating, which incorporates the prospect of government bailouts, and/or interventions such as recapitalisation by a parent (both factors that affect the ratings for our big banks), but want to look at an assessment simply of the balance sheet of the rated entity itself (“standalone ratings”).

I couldn’t see a nice summary of the Moody’s standalone ratings for the big banks in New Zealand, but I did find this summary of the S&P ratings, in an article on the Reserve Bank capital proposals.

S&P says the stand-alone credit profile of one or more of ANZ NZ, ASB, BNZ and Westpac NZ  could be increased to ‘a-‘ from ‘bbb+’ if the Reserve Bank proposals are implemented. And if their Aussie parents choose to inject capital to meet the Reserve Bank proposals, this could lift their stand-alone credit profiles to ‘a’ from ‘a-‘.

A stand-alone credit profile is S&P’s opinion of a debt issuer’s creditworthiness, in the absence of extraordinary intervention from its parent or affiliate or related government, and is one component of a credit rating.

The current standalone ratings are already at the upper end of the Baa/BBB rating.  I also couldn’t find a similar long-term default rates chart for S&P (like the Moody’s one above) but an S&P table of defaults since 1980 suggests a very similar default rate over that period for S&P BBB issuers (like the big New Zealand banks) than for Moody’s Baa issuers.

It is easy for people to have a go at rating agencies –  the Governor of the Reserve Bank has done so –  but actually what the chart at the start of the post highlights is that for conventional issues of securities, Moody’s seems to have done just fine (were they now rating issuers consistently too generously you would see an upsurge of defaults, but there has been no sign of that in recent decades).

This isn’t a new point: Ian Harrison has made much the same point, in a more developed way, in his critique of the Reserve Bank’s proposals.   But sometimes a picture helps.

According to the rating agencies – and recall that the Reserve Bank echoes the assessment in the tone of its comments in each FSR –  New Zealand banks already have a mix of asset books and funding structures (debt/equity mix) consistent with an extremely low probability of failure, even absent parent support.  Perhaps not inconsistent with that, no major retail New Zealand bank (or Australia or Canadian bank) has failed in a very very long time.

The case for much higher minimum capital requirements just hasn’t been made.

 

 

Some benefit from RB capital proposals…but probably not New Zealand

I might have written about something in this morning’s Herald but, despite being one of that diminishing number of hard copy subscribers, they still haven’t sent out the promised email on how to activate online access to the Premium material.   How hard can it be?

And so it is back to the Reserve Bank’s proposals to substantially increase the amount of capital banks have to have to fund their current level of business.

There was a column on interest.co.nz yesterday, by Gareth Vaughan, that will have warmed hearts at the Reserve Bank.     It begins this way

The Reserve Bank of New Zealand’s proposals to significantly increase the amount of capital New Zealand banks must hold should be a good thing for both banking competition and NZ taxpayers.

I’ll come back to the competition argument in a moment, but do note that the “good thing for NZ taxpayers” argument is not overly plausible.   The chances of a large bank failing are already very very small (see successive Reserve Bank stress tests) and –  on the Reserve Bank’s own telling (recall the Deputy Governor says that GDP will be perhaps 0.25 per cent lower each and every year) – the insurance premium is high.   (And that is before mentioning OBR –  supposed to help handle bank failures – or the fact that higher minimum capital ratios would also increase the gross amounts required in any crisis government recapitalisation.)

Vaughan presents the issue as a contest between the Australian banks and our doughty heroes the small New Zealand banks.  Of the former we read

Get set for opposition from the big four banks and their allies, including business lobby groups and professional services firms, to ramp up in coming weeks.

Make no mistake. The big four banks are very grumpy about these RBNZ proposals. This much is clear even though little has been heard from them publicly to date.

But the small New Zealand banks, so we are told, are much more sympathetic.   Why?  Because what the Reserve Bank is consulting on is actually a bundle of two, quite logically separate, proposals.

  • the first is to increase the minimum core capital (CET1) ratios for everyone (to 16 per cent of risk-weighted assets for the big 4 banks, and 15 per cent for all the other locally-incorporated banks.  I’m predicting that not a single directly-affected bank actually favours that increasse.   After all, if they thought it was such a good idea there is nothing to stop them running with a larger share of equity funding now.
  • the second is to treat the big 4 banks (which are allowed to use internal risk models, under Reserve Bank oversight, to assign risk weights) more similarly to the other locally incorporated banks, which have to use the “standardised” Basle weights, which are generally (although not always) higher.    At present, the Reserve Bank estimates that the big banks’ calculation of risk-weighted assets is only about 75 per cent of what it would be if they had to use the standardised weights.  The Bank proposes to put in a floor that would prevent the big banks have risk-weights (across the whole portfolio) less than about 90 per cent of what the standardised weights would produce.    (This floor is much higher than what is being applied elsewhere: APRA, for example, is planning to use a 72.5 per cent floor.)

The smaller locally incorporated banks are very keen on the second strand of the package.   And why wouldn’t they be?   They will be quite keen on larger banks having to hold higher headline capital ratios than they do too.  Again, why wouldn’t they.

I’m generally sympathetic to what the Reserve Bank is trying to do in reducing the possible gaps between the sorts of risk weights banks using internal models can use and those other banks have to use (and was sympathetic to that cause when I sat on the relevant policy committee at the Reserve Bank).   That is particularly so as the Reserve Bank has been very reluctant to allow other banks (notably Kiwibank) to use the internal models approach.   One could even mount an argument that, in the New Zealand context with simple balance sheets, little or nothing is gained by retaining the IRB class of banks (and risk-weighting at all).

But, at least in principle, the IRB system wasn’t designed to provide a competitive edge to big banks. In principle, it was designed to recognise that bigger banks had more sophisticated risk systems and (again in principle) that it would possible to show that in some areas the actual risk on a particular class of credits was lower than the –  inevitably somewhat arbitrary –  standardised weights would capture.   Separately, one could also argue that big banks would typically have more diversified portfolios than small banks   (think of how the old Taranaki Savings Bank might have fared had Mount Egmont had one of its larger eruptions).

In practice, the incentives are all wrong.  For regulatory capital purposes (for their own risk management it might be different) IRB banks had every incentive to try to game this system –  not even necessarily consciously –  and the regulator would always struggle to keep up.  It might be a rather crude response, but the floor at around 90 per cent seems like a reasonable approach (especially if it is transparent, and it is thus relatively easy to translate capital ratios calculated that way to compare with ratios in other countries with lower floors).  Perhaps there are compelling arguments against, but if so the big banks have not yet advanced them in public.

Here, from the Reserve Bank’s website, is a chart of the current CET1 ratios

CET1

The first thing to note is that the smaller banks generally have higher (headline) CET1 (core equity capital and retained earnings) than the larger banks.  The smaller New Zealand banks had an average ratio of 13.4 per cent of risk-weighted assets, and the large Australian banks had an average ratio of 11.4 per cent.     Apply the 90 per cent floor to the calculation of risk-weighted assets and that big bank average would drop by up to 2 percentage points.   In short, calculated the same way (the way the Reserve Bank proposes in the future), the big banks might now have an average CET1 ratio of perhaps 9.5 per cent, and the small banks are averaging 13.4 per cent.     And the Reserve Bank’s consultative document proposes that the 90 per cent floor would come into effect straightaway, pretty much as soon as the final decision is announced –  no five year transition period there.

It makes considerable sense that the big Australian banks have lower capital ratios than these New Zealand banks.  The former are  diversified parts of big Australasian market-listed banking groups.  In other words, not only is there a parent to provide support (if needed), but a mechanism for raising additional capital if things go wrong.    By contrast, not only are the New Zealand banks smaller, but only one is listed.  And only one has a parent (Kiwibank, owned by three separate arms of the New Zealand government).  Note that it is not the regulator who has required these differences –  9.5 per cent vs 13.5 per cent, measured similarly –  but rather “the market” (shareholders, directors, and management have together made choices that those small banks require higher capital ratios in New Zealand to compete effectively).

And, as it happens, in at least two of those cases (TSB and Co-op) current capital ratios are so high that the Reserve Bank’s proposals to increase minimum capital ratios won’t be very binding at all (the minimum for these banks will be 15 per cent).  Recall too that domestic owners of banks benefit from dividend imputation, such that any additional cost of additional capital is less than is the case for other banks.

Without very much market discipline (in most cases), it is hardly surprising that the small local banks will regard the Reserve Bank’s proposals as a win for them.  They won’t need to raise much more capital (in most cases), and the big banks will have to raise a lot.  If the proposals succeed, whereas the big banks have been able to have considerably lower core capital ratios than these small banks, in future the big banks are likely to end up with higher ratios.    One might question “to what end?” (in a policy/economics sense), but for the small banks it looks like a clear win.

Who else might think of these proposals as a clear win (and consider offering the Reserve Bank support)?   Why, surely the people who aren’t directly affected by them at all?  And that would include?   Well, for example, any foreign bank with operations here that aren’t locally-incorporated.  Impose a heavier regulatory burden on the locally-incorporated local competition, and what is not to like.   People whose business would be helped by more local bond issuance (corporate bonds or securitised assets) might also look benignly on what the Governor is proposing.

I don’t suppose any big foreign banks will actually be submitting in support.  After all, if the Reserve Bank proceeds with its proposals it will represent probably the most demanding capital regime in the world, and other regulators in other countries –  with their eyes on more capital – might in future point to New Zealand as some sort of model.   My point is just that one shouldn’t be surprised if there are some people who are quite keen on the changes, and only some of those making that case will be not self-interested.

The thrust of Gareth Vaughan’s argument (and there is no reason to suppose his argument is self-interested, any more than mine is on the other side), is that greater competition will follow from the proposed changes, and that that can only be good for the consumer of banking services (lender, borrower, or whatever).  But it is hard not to read what he is writing as mostly just anti Australian banks, regardless of the consequences for New Zealanders (household or businesses).  This is the final paragraph of his column

The owners of NZ’s big four banks have been the cats that got the cream over the past decade. The RBNZ’s capital proposals threaten to end, or at least disrupt, their halcyon days. Should the RBNZ proposals go ahead unchanged there could be some short-term pain for borrowers and savers. Given the market power of the big four banks it’s difficult to rule this out. But a level capital playing field ought to boost competition in NZ banking, and longer-term, should we face a banking crisis, taxpayers ought to be less on the hook than they would be under the current bank capital regime.

Perhaps he could show us a plausible scenario in which a large New Zealand bank –  with capital ratios already well higher than they were – fails?  Reserve Bank stress tests (and anything else they’ve published) has so far failed to do so.

But what about this  prospective greater competition?   Surely for the New Zealand consumer as a whole to be better off, we would need to see more capital, not less, voluntarily committed to the New Zealand banking market.  And how likely is that?

Sure the competitive position of the small banks is going to be improved, relative to what it is now, but –  as noted earlier –  only one of those smaller banks is a listed vehicle, and neither TSB, SBS, or Coop have means of raising lots more core capital without dramatically changing their ethos or ownership structure.    Perhaps Kiwibank might manage to wrangle lots more capital out of NZ Post, NZSF, and ACC….or perhaps not.  And how confident could we be that New Zealand would be better off with a very fast-growing government-owned bank, subject to few effective market disciplines.  That sort of entity has often been on a fast road to something very nasty.

And what of the Australian banks?  Perhaps they won’t look to divest some or all of their New Zealand operations, but it is hard to believe that in the wake of these proposed changes they will be keen on growing their New Zealand books (except perhaps putting big corporate loans on the balance sheet of the parent?).

All in all, it sounds like a recipe for wider intermediation margins all round, and less banking sector capacity in New Zealand.  Relatively speaking the small banks might win at the expense of the larger banks, but (a) that just has the feel of corporate welfare without needing to involve the Provincial Growth Fund, (b) most of them look capital-constrained (if contemplating seriously taking on the big banks and replacing capacity) and (c) more importantly, it isn’t clear how those wider intermediation margins and reduced capacity would enhance the efficiency and competitiveness of the New Zealand economy.   Rates of return on investment in the Australian bank subsidiaries probably will fall to some extent, but people like Vaughan –  and the Governor –  should be careful what they wish for.

(And, as a final reminder, levelling the playing field around the floor on the calculation of risk-weighed assets is a totally separable issue from what the minimum CET1 ratio should be.  If current levels of capital are consistent with systemic stability –  as the Reserve Bank repeatedly assures us in its FSRs is so – raising the floor in the calculation of risk-weighted assets could have been accompanied by a reduction in the minimum ratio of capital to risk-weighted assets without affecting by one iota the riskiness of the banks concerned.  I’ve made the case elsewhere for why the argument for higher minimum capital looks threadbare.)

 

 

Bank capital proposals still inadequately supported

When I opened the newspaper this morning and found the headline “The world needs ethical leadership”, above a column written by someone whose own leadership often fell well short of that standard, it was tempting to go chasing hares.

But I’m more interested in the damage the current leadership of the Reserve Bank is doing both to the standing of the Bank as an institution and –  more concerning still – to the New Zealand economy and private firms operating in it, by the Governor’s plans to require banks to raise a great deal more equity capital to support their current levels of business.  This morning I want to comment on a couple of contributions to that debate from two of my former Reserve Bank colleagues.

Before doing so, note that I hardly ever agree with the newspaper columns of Business New Zealand’s head Kirk Hope, but his column today on the bank capital proposals is right on point.  He ends with suggestion that really should be uncontroversial

BusinessNZ recommends that the Reserve Bank should undertake a comprehensive cost/benefit analysis of the proposals before any further steps are taken.

In fact, the Reserve Bank tells us repeatedly it only intends to do such an exercise when it is too late for it to inform any public discussion or submissions –  it will support whatever whim the Governor finally runs with, rather than assisting the development of policy and the contest of evidence and arguments around the proposals the Governor is hawking, and which the Governor himself will get to decide on.

It has been a quiet week in central Wellington, with many people taking the chance to use a few days’ leave to get quite a long autumn break.  Nonetheless, a fairly good crowd turned up at Victoria University at lunchtime on Wednesday to hear Ian Harrison critically review the Reserve Bank’s capital proposals.  Ian spent most of his career at the Reserve Bank, and did much of the modelling work associated with the previous review of capital requirements, undertaken only seven or eight years ago.  Since leaving the Bank he has also consulted for commercial banks on risk modelling and associated capital issues.

I’ve already written here about Ian’s March paper reviewing the Bank’s proposals.  Since that paper was written the Reserve Bank has published another 50 page paper attempting to buttress their case, and Ian’s latest presentation –  also titled “The 30 billion dollar whim” (with no question mark) – attempted to take account of that paper.  He has a further review paper coming; one hopes in time to inform submissions before the Reserve Bank’s deadline on 17 May.

The Bank’s claim all along has been that these proposals are a win-win.  We can have a more stable banking system –  despite never having had a systemic banking crisis (at least outside an immediate post-liberalisation period) –  and higher (expected) GDP as well.  This is one of their charts.

win win

It has never really rung true, and none of what they keep on releasing really buttresses their case.   As I’ve noted previously, in his speech in February the Deputy Governor acknowledged that the proposals could cut the level of GDP by “up to 0.3 per cent” (say, 0.25 per cent then), and to pay that insurance premium each and every year, on a policy which could be cancelled at any time on the whim of some future Governor, it would have to save us from something truly devastating perhaps 75 years hence.   Countries with floating exchange rate, reasonable institutions, and governments that keep out of credit allocation, simply don’t have those sorts of truly devastating events.  As I and others (including a rather more prominent US author) have noted, in the serious recession of 2008/09, the (floating exchange rate) countries that had financial crises didn’t perform materially worse than countries that did not.   Most likely, what the Reserve Bank is proposing won’t move us north-east of the orange dot (as the Bank claims), but more likely south-east.   We’ll be poorer but the banks –  already a stable core of (what the Bank tells us every six months is) a stable financial system –  will be sounder still.  It doesn’t seem like much of a deal…….especially without a robust cost-benefit analysis that we can properly review, or any open engagement with the criticisms various people have advanced.

Ian Harrison also points out that the Bank appears not to have take explicit account of the fact that our main banks are foreign-owned.  As he notes, most of the international modelling on capital works on the assumption that banks are largely domestically-owned.  If higher capital requirements mean higher total equity returns to shareholders that in itself isn’t a loss to the domestic economy –  just a transfer from one lots of nationals to another.   There might still be some cost in the form of lost output, resulting from a higher economywide cost of finance and wider intermediation spreads  (eg the Deputy Governor’s “up to 0.3 per cent”).  But in New Zealand, if we compel banks to have much more capital to support their level of business, and there is no full offset between the cost of debt and the cost of equity (and the Reserve Bank accepts there won’t be), there is an expected net transfer from New Zealanders to (in this case) Australia and Australians.  That is where Ian’s $30 billion number (a present value calculation) comes from.   It doesn’t figure in any of the Reserve Bank documents, which seems on the face of it a rather gaping omission  –  especially from a Governor who appears to have a strong prejudice against Australian banks.

There was a lot of material in Ian’s presentation and I can’t cover it all here.  But a few other highlights:

The Bank likes to claim that their new approach –  specifically identifying how infrequently they think New Zealand should expose itself to a financial crisis (once in 200 years is the Governor’s stab in the dark) –  is a significant step forward, and determines the proposed capital ratios that emerge from the analysis.  Ian notes that, if anything, it appears to be the other way round: they initially used a 1 in 100 year framing, found that produced results they didn’t much like (something like current capital requirements), and with no supporting analysis at all –  there is a single sentence footnote –  switched to the 1 in 200 year framing.   Support rather than illumination springs to mind.  The Governor seems to have wanted high headline minimum capital ratios –  regardless of cost, regardless of the fact that the way ours will be calculated will be more demanding –  and to have cast around for anything to prop up such a case.

In his rather whimsical vein, Ian goes on to suggest that there is so little substance behind the proposal that perhaps the proposed 16 per cent minimum capital ratios (CET1) for big banks might as robustly have been derived from the Governor’s fling with the tree god Tane Mahuta: the kauri tree of that name has a girth of 15.44 metres apparently, and allowing a little for growth we get 16.  In a similar vein, he goes on to note that kauri trees are (apparently) bigger than gum trees, which perhaps accounts for the Governor pushing his requirements well beyond those in Australia.

Ian unpicks the relevance of various of the overseas paper the Bank cites, including noting how dependent any of the results are on specific assumptions, specific sample periods (especially around loan losses –  using a short period centred on 2008/09 will produce different results than, say, using the last 100 years).  In some of the Bank’s New Zealand analysis (including around the late 80s/early 90s) instea of using loan write-offs (recorded just once, when the write off occurs) they’ve used average annual non-performing loan data – even though the same non-performing loan can remain on the books for several years, but can only be written off once.

He noted briefly, as I have at more length here, the important distinction between (a) marginal effects and average effects (we should only focus on what further reduction in crisis probability this further big increase in capital requirements will result in), and (b) between the costs of the bad lending and investment choices that led to loan losses, and the cost of bank failures themselves (the Reserve Bank simply never addresses this latter point).

In passing he notes that references to reducing fiscal costs of bank failures tend to be overstated: the common reference point in 2008/09, and yet bank capital ratios are already materially higher than they were then, and even in 2008/09 the net fiscal costs (after recoveries and sales) were often quite small.  Oh, and OBR here is supposed to further reduce, or eliminate, fiscal costs.

In its latest document, the Bank devoted a lot of space to the alleged social costs (suicides, divorces, mental health problems) etc of financial crises.  Ian looked at all their references, and I don’t think it would be going too far to say that the Bank’s representations were borderline dishonest –  often drawing from countries without a decent social safety net (or countries without the buffer of a floating exchange rate).  Again, the idea that the Bank was looking for support rather than illumination sprang to mind.

Ian ended his presentation with a simple insurance parallel, suggesting (as above) that the Bank was inviting New Zealanders to buy (well, perhaps compelling us to buy) a very expensive insurance policy of the sort no rational agent would ever buy voluntarily.  All backed up with inadequate analysis and no serious engagement.

After Ian’s presentation there were several thoughtful questions from the floor.  Graham Scott, former Secretary to the Treasury  back in the reform era and currently a member of the Productivity Commission –  a “dry” if ever there was one – asked about the assumptions around the Modigliani-Miller proposition.   At the extreme, this proposition asserts that the financing structure of a firm (mix between debt and equity) doesn’t affect the value of a firm.  In this case, for example, requiring banks to hold even a 20 per cent capital ratio wouldn’t affect the economics of banking  (required rates of return on equity, and debt costs) would fall to fully offset the increased equity component.  It would suit the Reserve Bank case to be able to argue that there is such a full offset, but they don’t. Instead, they assume something like a 50 per cent offset (thus, over time required rates of return on banking in New Zealand will fall, but not enough to fully reflect the reduction in the expected future variance of earnings).

Graham Scott’s point – which echoes one I’ve alluded to here on a couple of occasions –  is that the 50 per cent offset assumption may still be too high.  He notes that the big Australian banks’ New Zealand subsidiaries are not listed entities.  From a shareholder (in the parent) perspective the operating subsidiaries here are little more than another operating division of a much bigger company.  Every manager in every operating division will always be looking for excuses to deliver low rates of return (circumstances, regulatory factors or whatever) while still collecting their bonuses and we might be sceptical that the parents will accept low rates of return on bank business here simply because our Reserve Bank says they have to hold more capital.   Correlations also matter –  reduced variance in New Zealand earnings, might do little to reduce the variance of the earnings of the parent.

I suspect that the direction of the effect Graham Scott points to is correct, but that the effects might be seen in a rather disruptive way.  As I’ve noted previously, the Bank’s capital requirements apply only to locally incorporated banks.  Big corporates will have no particular problem getting credit from overseas banks that aren’t incorporated here.  These might include the parent (Australian) banks, all of which also have branches here, or any other significant bank in the world (Fonterra is most unlikely to pay a higher cost of debt because of regulatory stuff our Reserve Bank does).   The bond market also offers a mechanism to take locally-incorporated banks out of the mix –  not just for big corporates, but potentially for securitised home mortgages.  Some credits can’t be easily or quickly securitised and they are likely to be the ones who bear the brunt of the changes.  Overall, credit may be harder to get and more expensive.  The other group who may bear the brunt will be depositors –  borrowers can over time change their credit provider, but retail depositors (in aggregate) have fewer options (eg overseas branch banks can’t take significant retail deposits).

But none of this –  not a single strand of it –  is analysed in any of the material the Reserve Bank has put out.  Nothing about transitions, nothing really about steady states, nothing about how the fact that the requirements will fall on some but not others will affect the future structure of the financial system.  It is really inexcusably poor policy development and communication.  One business figure put it to me recently that there is a risk that the Bank’s proposal will actually reduce the soundness of the financial system –  increasing the soundness of the core banks themselves (perhaps, unless the parents choose to partly liquidate their exposures, and we are left with banks without strong parents), but reducing the significance of those core banks (and leaving many credit exposures less transparent than they are now).  I’m not sure I would yet go that far, but the rather limited and mechanistic approach the Reserve Bank is taking is leading them to overstate even any possible soundness gains, even as they ignore the likely output costs.

It simply isn’t a standard of policymaking we should accept.  The Minister of Finance and The Treasury –  if the latter isn’t distracted playing sun-moon cards and talking about their feelings –  should be demanding better.

And that is more or less the theme of another former Reserve Bank regulator, Geof Mortlock, in his piece on interest.co.nz earlier in the week.  After noting how resilient the Reserve Bank’s own stress tests suggest the New Zealand banking system is, and noting some of the likely costs and disruption, Geof notes

One would think that these costs and other adverse impacts would have received a great deal of attention by the Reserve Bank in undertaking a cost/benefit assessment of the proposals.  But no.  By their own admission, they have not yet undertaken a comprehensive cost/benefit analysis.  (Perhaps Adrian Orr was too busy engaging in god-to-god dialogue with Tane Mahuta and the forest fairies to give serious policy matters his attention! Deities are so busy of course.)

I don’t agree with all Geof has to say –  he is much more optimistic about the value supervisors can bring to the table than I am – but on the lack of proper, searching, evaluation and robust ex ante cost-benefit analysis we are at one.  As Geof says, it just isn’t good enough.

Geof’s bottom line is this

What is needed is an in-depth independent, professional assessment of the Reserve Bank’s capital proposals. Treasury will no doubt review the Reserve Bank’s cost/benefit assessment once the Regulatory Impact Statement has been prepared. However, that is too late in the policy formulation stage. Moreover, with all due respect to Treasury, it lacks the depth of knowledge needed for a rigorous assessment of the different policy options and the costs and benefits of each. What is needed is for Treasury, at the direction of Grant Robertson, to engage a couple of independent professionals (such as an academic specialised in bank regulation and a recently retired foreign senior bank regulator – e.g. John Laker, former Chairman of APRA) to undertake a comprehensive assessment of the Reserve Bank proposals, plus alternative options. The findings of this assessment should be incorporated into the Treasury’s own review and the results be made public. The independent review would considerably assist the quality of the process of assessing the Reserve Bank’s proposals and may assist in reaching a more sensible outcome.
An independent review would sensibly include consideration of:

  • the magnitude of economic shock needed to cause any of the large banks in New Zealand to fail, and the probability of such a shock occurring;
  • the level of capital needed to enable banks to survive a plausible range of severe economic shocks;
  • the composition of capital requirements and other loss absorption facilities that would be suitable to enable banks to survive severe economic shocks, including whether (as in many countries) a substantial proportion could be in the form of debt instruments that convert to equity upon defined breaches of core equity capital ratios;
  • the impact of the proposed increase in capital ratios on bank lending, interest rates, property prices and economic growth (with implications for government revenue);
  • the impact of the proposed increase in capital ratios on banking system contestability, competitiveness and financial inclusion (especially for those on low incomes);
  • the alternative policy options for strengthening the resilience of the banking system, including strengthening Reserve Bank supervision of banks’ governance, risk management practices, lending policies, and recovery planning;
  • the bank failure resolution options that could be applied to maintain financial stability with minimal taxpayer risk (and hence reduce the need for high capital ratios).

The Minister of Finance and Treasury need to give serious attention to these matters. And the sooner the better.

I have a lot of sympathy with that.  If the Reserve Bank’s supine Board had been doing its job they would have strongly urged the Governor to take such a path –  and/or prior open consultation before the Governor himself took a view –  from the start.  It is all the more pressing that things be done properly, evaluated rigorously, contested vigorously, when it is the Governor personally who is championing these (extreme) changes and the Governor personally who will finally make the decision (with no rights of appeal or review).

As a final note, generally I don’t think the banks help themselves. On both sides of the Tasman banks are typically scared of being openly critical of their regulator.  I can understand that to some extent –  regulators exercise a lot (too much) power on a lot of dimensions –  and no doubt the banks will raise significant concerns in their own submissions.  But by the time the submissions are in – and especially by the time the public ever see those submissions –  it will be too late to marshall a wider pool of support for their case.  Sure, banks are not naturally particularly sympathetic entities, but this is one of those cases where what is bad for banks is probably bad for New Zealanders and the New Zealand economy as a whole.   Sadly, banks have made no effort to engage in any public debate on these issues over the 4+ months this Reserve Bank proposal has been in the public domain.

 

 

Critics of the Governor

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.

 

Reading the RBA FSR on bank capital

One of the frustrating things about the Reserve Bank’s consultation on its proposal to greatly increase the amount of capital (locally incorporated) banks have to have to conduct their current level of business in New Zealand, is its utter refusal to produce any serious analysis comparing and contrasting their proposals to the rules (actual and prospective) in Australia.   The larger New Zealand banks are, after all, quite substantial subsidiaries of the very same Australian banking groups.    If there is a case to be made either that the New Zealand proposals are not more materially demanding than those in Australia, or that, if they are, there is a sound economic case for our regulators to take a materially more demanding stance than their Australian counterparts, surely you would expect that a regulator serious about consultation, allegedly open to persuasion (and working for a government that once boasted that it would be the “most open and transparent”) would make such a case.   But months have gone on and there has been nothing.

It is striking that over the entire period when the consultation has been open we have not had a Financial Stability Report from the Reserve Bank (I guess it is just the way the timing worked, but still…).      With proposals out for consultation that would force banks to have much higher risk-weighted capital ratios, working to the statutory goal focused on the soundness of the financial system, you’d have to assume that any FSR would conclude that the financial system at present was really quite rickety.   Perhaps they will when the next FSR comes out late next month, but (a) it would be a very big change of message from past FSRs, and thus (b) I’m not expecting anything of the sort.

A reader pointed out that the Reserve Bank of Australia released its latest Financial Stability Review last week.   The RBA isn’t the regulator of the financial system, but works closely with APRA, and has some systemic responsibilities (including the analysis and reporting ones reflected in the FSRs).   Capital requirements (on both sides of the Tasman) feature in the chapter on the Australian financial system.

The discussion starts this way (ADI = Australian deposit-taking institution).

RBA 1

You’ll recall that the Reserve Bank of New Zealand’s proposal would (a) require major banks to have a minimum CET1 ratio of 16 per cent of risk-weighted assets, and (b) would measure risk-weighted assets in a more demanding way than Australia does.

Here is graph 3.6 –  a really nice chart with lots of information in a small space.

RBA 2

The first panel is the one of most relevance here, relating as it does to the four banks that have major operations in New Zealand.   The regulatory minima are shown in the two shades of purple, and the additional capital held above those regulatory minima is in blue.   Three of the four banks are already at the “unquestionably strong” benchmark level.

I also found the the second panel (other listed deposit-taking entities) interesting.  In a post earlier in the year, I suggested that too-big-to-fail arguments weren’t a compelling reason for higher minimum regulatory capital requirements, as there wasn’t obvious evidence that entities that no one regarded as too-big-to-fail were required by market pressures to have capital ratios materially above those prevailing at larger institutions.   This chart may suggest this point holds in Australia too (deposit insurance muddies the water, but does not apply to wholesale creditors).

The RBA discussion goes on

rba 3.png

with a footnote elaborating the point

RBA 4

Unlike the Reserve Bank of New Zealand, they don’t just claim it is hard to do international comparisons, and then blame copyright to defend not presenting any analysis.    And APRA has actually published its analysis comparing  the way risk weights etc are applied in Australia and other countries.

So the Reserve Bank of Australia (and, presumably, APRA) claims that the capital ratios applying to the major Australian banking groups are in the upper quartile internationally, based on actual CET1 ratios of “only” around 10.5 per cent.   The Reserve Bank of New Zealand, by contrast, has tried to claim –  with no real analysis, just a bit of gubernatorial arm-waving –  that its proposed CET1 minima of 16 per cent (measured materially more conservatively again) would also be inside the range of requirements in other advanced countries, probably also in the upper quartile.

At a substantive level, the two claims are just not consistent.    Perhaps the Australian authorities are wrong in their claims, but I doubt it.  I could advance several reasons to have more confidence in the Australia regulators’ claims:

  • they have a much deeper pool of expertise than the Reserve Bank of New Zealand, and two agencies (RBA and APRA) able to peer review work in the area before it is published,
  • the Australian parent banking groups are all listed companies and there is considerable broker analytical resource devoted to monitoring and making sense of the performance of those banks and the constraints on them,
  • for what they are worth, the credit ratings of the Australian banking groups are consistent with them having capital ratios and risk profiles in the upper (safer) part of the distribution of advanced country banks,
  • the Reserve Bank of New Zealand has simply avoided the Australian comparisons in all the material it has released (so far).

Whatever the absolute position, we can be totally confident that the Reserve Bank of New Zealand’s CET1 minima are far more demanding than those APRA applies to the Australian banking groups  (16 per cent minimum –  perhaps 17-18 per cent actual –  vs the benchmark actual of 10.5 per cent in Australia, where the New Zealand requirements will be measured in a more conservative way.  Not one shred of argumentation has been advanced by the Reserve Bank of New Zealand to explain why they, in their wisdom, think New Zealand banks need so much higher risk-weighted capital ratios.   There might be a case to be made –  something about risk profiles, or reckless Australian regulators perhaps –  but they just haven’t made it  (and it would have to be a pretty compelling case given that the major New Zealand banks have large parents –  to whom the regulator might expect to look in a crisis –  whereas the Australian banking groups don’t).   That simply isn’t good enough.

The RBA goes on to discuss the Reserve Bank of New Zealand’s proposals.

rba 5

That text correctly notes not suggest that the headline CET1 ratios required here would be much larger than those applying to the Australian banking groups, but would be measured in a more conservative way than has been the case hitherto (and more conservatively than APRA will be allowing Australian banks to do).

The rest of the paragraph interested me, especially that final sentence.  It appears to suggest that the rules would apply differently depending whether the capital of the New Zealand subsidiaries was increased through retained earnings or through a direct subscription of new equity by the parent.  In economic substance the two are the same, and regulatory provisions should be drawn in a way that reflects the substance.  But the paragraph is perhaps a reminder that one possibility open to the Australian parents, if the Reserve Bank persists with its proposals, is a divestment in full or in part.  Comments from the Reserve Bank Governor and Deputy Governor have suggested that they would not be averse to such an outcome, and might even welcome it.  I think a much less cavalier approach is warranted and that the New Zealand generally benefits from having banks which are part of much larger groups.

The RBA discussion also has a chart show bank profits in Australia since 2006 (I truncated a bigger chart so the dates aren’t showing).

rba 6

As they note, return on equity is less than it was in the mid-2000s, not inconsistent with the higher capital ratios (reduced variance of earnings) in place now.     The (simple) chart is perhaps consistent with the Reserve Bank of New Zealand’s story that banks will come to accept lower ROEs on their New Zealand operations over time if higher capital ratios are imposed, but (a) the transition may still be difficult (especially for sectors with few competing lenders), and (b) there is no guarantee, since shareholders will focus on overall group risk/return, not the standalone characteristics of one individual unlisted subsidiary.

Part of the Reserve Bank of New Zealand’s attempt to obfuscate the Australian comparisons is to muddy the waters by suggesting something along the lines of ‘total capital requirements will end up being much the same, but our banks will have much better quality capital’.

As you can see from their own text, the Australian authorities put much more weight on the core (CET1) ratios, where Australia’s (quite demanding by international standards) expectations will be a lot less than those proposed for New Zealand.  But the Reserve Bank of Australia text touches on the additional loss-absorbing capital as well.

RBA 7

RBA 8

Here is the summary of the APRA proposals.  These additional requirements, if confirmed, would be able to be met with ‘any form of capital’, including (for example) the contingent-convertible bonds (typically hold by wholesale investors, and which convert to equity in certain pre-specificed distress conditions) which the Reserve Bank of New Zealand has taken such a dim view of (to disallow for capital purposes).  This additional loss-absorbing capacity is typically regarded as much cheaper than CET1 capital, and (coming on top of upper quartile CET1 funding) serves just as well in protecting the interests of creditors in the event of a failure of a major financial institution.   For any banking regulator interested at all in efficiency that should count strongly in its favour, but even more so in New Zealand where the big banks are subsidiaries of the Australian banking groups, failures will inevitably (and rightly) be handled on a trans-Tasman basis, and where most of what matters is securing a substantial share of residual assets for New Zealand depositors and creditors.

But even allowing for all that, look at the nice summary chart from APRA of their proposals

APRA 1

If fully implemented:

  • the APRA proposal for Australian banking groups would amount to a 16 per cent total capital ratio requirement, with risk-weighted assets measured the Australian way, while
  • by contrast, the Reserve Bank of New Zealand proposal would involve a 16 per cent CET1 capital ratio minimum requirement (8 per cent in Australia – the CET1 and CCB components), with risk-weighted assets measured the New Zealand way, and
  • the Reserve Bank proposal include a plan to raise the minimum risk-weights (in a not unsensible way, considered in isolation) that would mean a 16 per cent CET1 requirement in New Zealand might be equivalent to something like 19 per cent range in Australia.  The proposed floor –  risk-weighted assets calculated using internal models, relative to the standardised approach –  in Australia is, in line with Basle III. 72.5 per cent, and the RBNZ is proposing a 90 per cent floor: apply a ratio of 90/72.5 to give an indication of the scale of the possible effect).

The simple summary is that (even if the Reserve Bank of New Zealand ends up scrapping any Tier 2 capital requirements, and it seems quite ambivalent about them in the consultation document) its capital requirements will be (a) materially higher than those applied to Australia to the parent banking groups, (b) materially more costly, because of a largely-irrational aversion to forms of capital other than CET1, even though we have good reason to take seriously the claims of the Australian authorities (and the sense of the rating agencies) that Australian banks are already among the better-capitalised in the world.

In hundreds of pages of material, slowly released over several months, the Reserve Bank of New Zealand has not provided a shred of evidence, or even argumentation, for why locally-incorporated banks operating here should face such an additional regulatory burden, with the attendant economic risks and costs.  Add in the refusal of the Bank to provide a decent cost-benefit analysis as part of the consultation (they promise only at the end of it all, when there is no further chance for public input, and no appeals), and there are few grounds to have confidence in what the Governor (prosecutor, judge, and jury –  with no appeal court) in his own case is suggesting.   We should expect better. The Minister of Finance (and the supine Board) should be demanding more.

For anyone in Wellington next week and interested, Ian Harrison (who used to do a lot of the Reserve Bank modelling work around bank capital) is doing a lunchtime lecture/seminar on the Reserve Bank proposals next Wednesday.   You might think I’m fairly critical of the Reserve Bank. Ian is more so, and tells me he has chased every reference in every document the Bank has published in support of its case, and still isn’t remotely persuaded of the merits of the Governor’s claims.