Gift receiving at the Reserve Bank

I was following up something this afternoon, and noticed that the Reserve Bank had posted an OIA response to someone inquiring about gifts accepted by staff.

There is almost two years of data, and the overall list isn’t that long.   I’ve been the recipient of all sorts of, mostly small, things over the years –  often from visiting central bankers or the like, but including the odd corporate box invite, dinners, and so on.   If anything, I’m a little surprised the Reserve Bank’s list isn’t longer –  in my days in the Financial Markets Department, corporate hospitality was part of relationship management, particular for our dealers.   The Bank must have tightened up: there is a surprisingly small number of cases of financial markets staff accepting hospitality etc.

But one element of the list really did catch my eye.  The Reserve Bank supervises banks, non-bank deposit-takers, and insurers: in doing so, it can have a big influence on the businesss of those institutions.    So one of the things that is very important is that the Reserve Bank’s supervisory staff keep a suitable distance from the institutions they are regulating.

On the gifts list, three banks operating in New Zealand showed up.  The first was BNZ, offering hospitality (twice) to Mark Perry, the Reserve Bank head of financial markets (and a former BNZ employee).   Mark won’t be involved in the supervisory or regulatory side of things.  The second was Bank Baroda, which presented a couple of books, which were passed on to the Reserve Bank library.

The bank that showed up most was ICBC.  It showed up seven times, on each occasion offering gifts to people with a direct involvement in bank regulation.   These ranged from a wall-hanging presented to the Governor by the bank chairman from China (not kept personally by the Governor), through to a box of food, cheese boards given to four staff, three note pads and a wireless mouse, a mobile power pack (again not kept by the individual) at the end of a supervisory meeting, and another wall-hanging presented to the Deputy Governor (not kept by him personally) by “ICBC Mr Wang Lin, Secretary of Party Discipline Committee”.

There was also another gift, accepted by the relevant staff, from a foreign bank at a meeting to discuss a possible application for bank registration.

I am not, repeat not, suggesting that any Reserve Bank official will have directly changed their stance on any matter to do with ICBC because of these fairly small gifts.  But appearances matter, and so does substance.   It is simply inappropriate for Reserve Bank staff to be accepting gifts from banks they regulate, no matter how small those gifts are.  Taken together such small gifts can foster an atmosphere that makes the regulator a little less willing to ask hard questions, or to confront problems, than they might need to be.

The Reserve Bank’s rules need to be tightened up and the banks concerned need to be reminded –  in the Governor’s words –  that these are New Zealand registered banks, no matter which country the bank concerned’s shareholders and owners happen to be based in.   Regulators simply shouldn’t be taking gifts from the regulated, not even as a matter of “courtesy”.



Conduct among the regulators

As we know, the Reserve Bank and the Financial Markets Authority have been playing the populist politicians, “demanding” that banks (in particular) prove that they are not guilty of the sort of misconduct coming to light in the Australian Royal Commission.  The Governor had told us he thought New Zealand banks were different, until either he saw which way the political winds were blowing, or saw the FMA getting on the bandwagon and didn’t want to be left behind.  But proving your own innocence is simply not something anyone in a free society should be required to do.

But what about the regulatory agencies themselves?  They don’t deal directly with the general public very much, but if they are mounting their bully pulpits and demanding banks (private businesses) prove themselves, we might first reasonably expect the highest possible standards from them.  After all, the FMA and the Reserve Bank are public institutions; they work for us.

How can you say to your brother, ‘Brother, let me take the speck out of your eye,’ when you yourself fail to see the plank in your own eye? You hypocrite, first take the plank out of your eye, and then you will see clearly to remove the speck from your brother’s eye.

How, for example, do the boards of these institutions handle conflicts of interest?   This is a particularly significant issue for the FMA, where the Board has direct responsibility for all the agency’s decisionmaking (the administration of things like the Financial Markets Conduct Act and associated rules and regulations).  They make decisions directly affecting specific businesses, and interests.

It is less of a direct issue at the Reserve Bank, where the Board itself has few powers.  But Board members are still privy to considerable amounts of inside information, and have preferential access to the ear of the Governor.  The Bank runs a commercial business (NZClear), and has significant property interests (the building on The Terrace) and major commercial contracts around notes and coins.

A few months ago when the Independent Expert Advisory Panel reviewing the Reserve Bank Act reported, they included in their report this reference

114. The Board has a code of conduct. The Panel recommends that this be reviewed in light of the legislative changes.

So I asked for it, lodging a simple request

Please supply me with a copy of the code of conduct.

And the Bank responded quite quickly.   There was, I was told,

no Board document of that name, but the Charter outlines conduct expected of Directors.

The text of the “Charter” is at that previous link.   I’ve written about the so-called charter previously.  But one thing I didn’t notice then –  and recall, they say this document describes expected behaviours of directors –  is that there was nothing dealing with possible conflicts of interests, and how those should be handled.    That seems more than a little surprising.

I’ve previously had minutes of Board meetings released to me under the Official Information Act, and there was no sign in any of them that conflicts of interest are appropriately disclosed, and handled, or rules meaning that no member with a conflict is able to participate in matters relevant to that discussion. For example, one Board member is also a director of an insurance company, and the Bank is prudential regulator of insurers.  The Board, and the Bank, can’t control who ministers appoint to the Board, but they have clear responsibility to manage any conflicts.

I’m not suggesting actual impropriety –  I assume they must (surely?) have some unwritten practices –  but I wonder how they would prove their innocence to some crusading bureaucrat or politician?  Paper trails matter and, as I’ve noted previously, the Board has form in that area, being in clear breach of the Public Records Act in the way it conducts its regular business.  For a government agency, that is pretty clear misconduct.

What of the FMA Board?  They get marks for this explicit statement on their website

The FMA Board recognises conflicts of interest as serious governance issues. The FMA maintains a Board Conflicts Policy which manages how interests are to be disclosed, registered and properly managed in relation to any matter that the FMA is considering.

So I asked specifically for this document, which they released in full a few days ago.

FMA Board Conflicts Policy

For the most part, it looks pretty good. They seem to define conflicts reasonably broadly (at least in some respects), and recognise that such conflicts might arise from the interests and activities of spouses, partners, and children.   There is active requirement to disclose, and an encouragement to be open and broad in applying the policy –  members are even referred to a relevant Supreme Court case.

6. A Member who is interested in a matter:
(a) must not vote or take part in any discussion or decision of the Board or any Committee relating to the matter or otherwise participate in any activity of FMA that relates to the matter;
(b) must not sign any document relating to the entry into of a transaction or the initiation of the matter; and
(c) is to be disregarded for the purpose for forming a quorum for that part of a meeting of the Board or Committee during which a discussion or decision relating to the matter occurs or is made.

And they are required to advise the Minister of any breach of the policy.   I was quite impressed.  Until I came to this, near the end.

The Chairperson may, by prior written notice to the Board permit one or more Members to remain involved in a matter to which they have an interest if the Chairperson is satisfied that it is in the public interest to do so. Such permission may be subject to any condition which the chairperson considers necessary. All such permissions must be disclosed in FMA’s annual report.

Not even a majority of the Board has to agree, just the chair.  How can it ever be appropriate for someone with a conflict of interest to be, or remain, involved in the FMA’s determination of a matter in which they have an interest?  The Board has a range of members, and presumably can call on outside expertise on any matter on which it needs advice.  It seems almost unconceivable that there could be a circumstance in which a person’s contribution was so unique and irreplaceable that they should remain involved despite having declared and established a conflict of interest.    It is, perhaps, some small comfort that any such occasions have to be disclosed in the Annual Report (I didn’t see any in the latest Annual Report) –  but the Annual Report comes out with a considerable lag (and probably isn’t widely read).  Since making this sort of exception isn’t a breach of the rules, it doesn’t even need to be disclosed to the Minister at the time.

That rule, set up by the Board to govern its own conduct, falls well short of the sort of expectations we should have for a powerful public agency.  It should be clear and straightforward: if you have a conflict, you take no further involvement, and go out of your way to stay clear of this issue.  At very least, it is potential misconduct –  inappropriate conduct –  by the Board of the FMA, an institution content to demand that banks prove their innocence.

I could go on.  Compliance with the letter and the spirit of the Official Information Act is one of those standards of conduct we might expect from our regulatory agencies.  The Reserve Bank falls a long way short of the mark on that one (they are, for example, still fighting to keep secret their analysis, from last November, of the extent to which Kiwibuil might crowd out other construction).

And then there were some of the issues I wrote about a couple of weeks ago, whether neither the Bank nor the FMA could reasonably be considered to have met the sort of standard they expect –  under law, or not –  from others.


This week we’ve had the unseemly sight of leading public servants engaged in rank populism, publically demanding private companies prove their innocence of non-specific charges – and not in a court of law, but to the satisfaction of the “prosecutors” themselves, Adrian Orr and Rob Everett (with apparent encouragement from the Minister of Finance).  In the new Governor’s case, it wasn’t as if he’d even managed to keep to the same line from one week to the next: in interviews a couple of weeks ago he wanted us all to know that New Zealand was different and there wasn’t anything to worry about, but by this week he’d jumped on board –  perhaps not wanting to be left out –  with the chief executive of the Financial Markets Authority and was “demanding” answers from banks.

In the Governor’s case, the legislation he works under appears to give him no basis for such actions or demands –  his banking supervision powers are about the maintenance of a “sound and efficient” financial system, not about market conduct.   And independent central bankers –  overmighty citizens at present, with all that power in one man’s hand –  are well advised to stick to their knitting, the powers and responsibilities Parliament has specifically delegated to them.  Cheap populism is a dangerous path to take in pursuit of some faux legitimacy.    I’m much less familiar with the FMA’s statutory powers, but it is pretty unseemly to have public servants leaping into the public domain demanding that private companies justify themselves (with no specific charges or allegations) to them.   We are suppposed to be ruled by laws not by men, and just because Australian-owned banks aren’t overly popular in some quarters doesn’t exempt them from those precepts and protections.

Of course, the Governor and the FMA chief executive playing populism sets up its own equally unappealing set of responses.  The Bankers’ Association has published an open letter they sent back to Orr and Everett which is full of shameless pandering.  There was this

“Ultimately decisions about regulatory responses rightfully rest with you, and you have our commitment that we will support any response”


(a) none of this has anything to do with the Reserve Bank and the legislation it operates under,

(b) the FMA does not set its own regulations, but operates under legislation passed by Parliament and regulations promulgated by ministers,

(c) Royal Commissions, a la Australia, are entirely a matter for elected politicians, and

(c) no serious person is going to commit to support just any regulatory response, with no idea what form such responses might take.

There was also this

Proactive agenda of regulators: The New Zealand regulatory framework enables regulators to act dynamically and quickly before issues become significant, compared to the slower, less agile pace witnessed in Australia……We have also seen that foresign and adaptability in RBNZ’s use of loan-to-value lending restrictions, which proved effective in managing the escalating housing market and the associated economic risk.

Let me throw up now.

I’m still in the camp that thinks it inherently unlikely that matrix-managed subsidiaries of Australian parents are doing things that much differently here than in Australia (and, after all, the BNZ’s new chief executive has been part of the NAB Executive Leadership team for the last few years).  But evidence would be a good basis for regulators (those with suitable powers and responsibilities) to start inquiries, not highly-publicised populist fishing expeditions, and the associated slurs.  And evidence needs to go a bit beyond a suggestion that a bank might have suggested their Kiwisaver product to go along with your mortgage or cheque account –  akin to a burger chain encouraging you to consider fries with your burger.  If we must have populism, leave it to the politicians.  We can toss them out.

As I noted the other day, it isn’t as if the Reserve Bank and the FMA have been particularly good at dealing with specific conduct issues, on which they have detailed evidence.    The Reserve Bank’s misconduct –  and the passivity of the FMA –  doesn’t affect tens of thousands of people, but it doesn’t make it any more acceptable.  Perhaps it is a straw in the wind of the way many New Zealand institutions choose to operate?

After writing that post, into my email inbox popped the newsletter of that worthy NGO Transparency International.   Their website proclaims this mission

“A world with trusted integrity systems in which government, politics, business, civil society and the daily lives of people are free of corruption.”

The longserving chair of Transparency’s New Zealand arm is Suzanne Snively.  In this month’s newsletter she writes

The point of transparency and accountability is to strive to do the right thing in all activities.

New Zealand banks and insurance companies have been quick to distance themselves from the evidence found by the hearings before the Royal Commission.

The challenge is that New Zealand’s largest four registered banks – ANZ, ASB, BNZ and Westpac, are subsidiaries of Australia’s four largest banks. AMP is one of New Zealand’s largest insurance companies.

It is naive to believe that the New Zealand system is different without solid evidence. It is not enough to have the industry self-disclose. This after all, is what happened prior to the current Australian inquiry. Only through the process of independent scrutiny have we learnt what really is going on.


Based on evidence before the Commission that has to date been made public, much of the misconduct could be regarded as corruption. Corruption is the abuse of entrusted power for private gain.

The best antidote for corruption is the existence of strong integrity systems within organisations. An integrity system refers to the features of the entity’s structure that contribute to its transparency and accountability.

In high integrity organisations, transparency and accountability starts at the top, led by good governance supported by management policy and practice…….

New Zealand can own the leadership position and model good behaviour to the rest of the world.

Those are fine words.  So it is perhaps unfortunate that Ms Snively was closely involved in the abuse (misconduct at least) that I outlined the other day.

Back in the late 80s and early 90s, she was a Board member of the Reserve Bank.   Until the current Reserve Bank Act came into effect in early 1990, the Board was (in effect) the Reserve Bank –  all power and responsibility rested with them, and they delegated any powers they chose to the Governor.  After that, (in law) the Board assumed the current monitoring and accountability role.

The Bank’s Board had an active involvement in the reform of the Bank’s staff superannuation scheme (minutes from that era record substantive ongoing engagement).  Under the trust deed of the scheme, Board consent was required for any changes to the rules.   And a majority of the trustees of the superannuation scheme were either Board members themselves or appointed by the Board.  The then Governor was a trustee (ex officio), and so was Ms Snively.

And this  (extracted from the earlier post) was what happened in 1998, with Ms Snively serving as a Board member and trustee.

Suppose that the rules of a superannuation scheme explicitly required that any rules changes that could have an adverse effect on the interest of any member in that scheme could only be made with the unanimous consent of such members.

Suppose too that nonetheless the trustees of such a scheme went ahead and changed the rules of a defined benefit scheme in a way that allowed the employer to arbitrarily (ie no constraints at all) reduce the rate at which pension benefits were calculated (including in respect of periods of employment, and employee contributions, prior to the rule change).  No consent from potentially affected members was sought for this change.

Suppose that in making this change, they had the endorsement/consent of the board of directors of the employer, and of the chief executive of the organisation.

Suppose too that that new power was actually exercised by the employer, in a way which led to longstanding employees later retiring with pensions considerably lower than they would otherwise have been.  That represented a substantial wealth transfer (probably millions of dollars) to the employer.

It was an egregious abuse of power, and a betrayal of the trust responsibilities to members that all trustees had.

This wasn’t the only shady item during Ms Snively’s term as a government-appointed Board member, and as a trustee.   In 1991, a rule change was made to the scheme (not much more than a single line in a big package of changes).  It was done very late in the piece, with no consultation with members.   To this day, people argue whether it made anyone worse off, but under the law –  the Superannuation Schemes Act –  any rule changes were required to be advised in writing to members.  That simply wasn’t done.  It was an offence under the Act –  for which, fortunately for the trustees of the day, including Ms Snively, the statute of limitations has long since expired.  This point isn’t contentious: today’s trustees a few years ago issued a formal apology to members for that breach.

There is also reason to doubt that the rule change itself was ever properly made (consciously approved by the Board and trustees).  In fact, one trustee from that period has sworn an affadavit that he had no knowledge of the change (although he signed each page of the fairly-lengthy revised deed), suggesting questionable behaviour by Reserve Bank senior management.

Good governance when Ms Snively was on the Board and the trustees also appears to have involved the same law firm  (same lawyer) advising the trustees as was advising the Reserve Bank itself, despite the manifold potential for conflicts between the interests of members and those of the Bank.

These particular episodes occurred a long time ago (although, to the extent there was misconduct, the effects are still felt today –  that is nature of locked-in long-term retirement savings vehicles, one of the reasons there is a case for regulation).  And Ms Snively hasn’t been on the Board or a trustee for a long time.   But I understand that these issues were brought to her attention a few years ago, and she apparently displayed no interest in either getting to the bottom of them, or exerting the sort of moral suasion one might expect from someone who is head of Transparency International.

And it isn’t as if she is now completely detached from all things to do with the Reserve Bank.  A few months ago the new government appointed Ms Snively to head an Independent Expert Advisory Panel, listing as the first item that qualified her her former role as a director of the Reserve Bank.  She continues to play, apparently, a lead role in advising the government on the reform of the Reserve Bank Act, including the (rather large) chunks governing the Bank’s financial regulatory powers.

No doubt she has no legal powers or entitlements at this stage.  But part of leadership is a willingness to take a stand, to seek to exert some moral authority.  And particularly when you yourself are directly complicit in some institutional misconduct from years ago, all while now leading the cause of integrity in public life, one might have hoped –  perhaps might still hope? –  for more.  Integrity sometimes involves going the second mile; it isn’t just a matter of systems, processes, and bureaucratic procedures, or the attempted cover of “oh, I’ve moved on”.

Much the same might be said of today’s Reserve Bank Board.  They appoint a majority of the trustees, they appoint the chair of trustees, they have to give consent to any rule changes.  Until 2013 the then chair of the Board served as a trustee.  They are fully aware of all these issues, and until very recently the Governor himself served as a trustee.  But the Board seem to have seen their role as providing cover for the Governor, rather than ensuring that the right thing is done, and that past abuses are corrected, not kicked for touch, hoping the injured parties would just go away.   That sounds like the sort of misconduct –  not illegal, but not the sort of approach we should expect from ministerial-appointed people, explicitly there to hold management to account –  the authorities might make a start on.  There is, after all, something concrete to go on there, even if it doesn’t make such good headlines.

Perhaps the Reserve Bank (and the FMA) should heal themselves

Suppose that the rules of a superannuation scheme explicitly required that any rules changes that could have an adverse effect on the interest of any member in that scheme could only be made with the unanimous consent of such members.

Suppose too that nonetheless the trustees of such a scheme went ahead and changed the rules of a defined benefit scheme in a way that allowed the employer to arbitrarily (ie no constraints at all) reduce the rate at which pension benefits were calculated (including in respect of periods of employment, and employee contributions, prior to the rule change).  No consent from potentially affected members was sought for this change.

Suppose that in making this change, they had the endorsement/consent of the board of directors of the employer, and of the chief executive of the organisation.

Suppose too that that new power was actually exercised by the employer, in a way which led to longstanding employees later retiring with pensions considerably lower than they would otherwise have been.  That represented a substantial wealth transfer (probably millions of dollars) to the employer.

And suppose that the Government Actuary had been required to give consent to such a rule change, and in fact did so.

That looks to me a lot like serious misconduct, quite possibly illegality.

And who are the players in this tawdry drama?

Well, there was the Government Actuary, a task now absorbed by the Financial Markets Authority.

And there was the Reserve Bank of New Zealand, its Governor (appointed by the then Minister of Finance), and its Board (all appointed by the then Minister of Finance).  Serving on both the board, and the trustees of this superannuation scheme, was the Governor, and someone who is now chair of the New Zealand arm of Transparency International, an NGO allegedly committed to good governance etc.

The initial misconduct happened quite long time ago.  In 1988 in fact.    But for years now some members have been trying to get redress, and even recognition of the problem.  It has been going for sufficiently long that when Adrian Orr was last at the Bank –  as Deputy Governor and Head of Financial Stability –  he was involved, fobbing off concerns raised by some of his own staff.

Four years ago, a particularly persistent member formally raised the issues (the one I’ve outlined here isn’t the only example, although is probably the most serious) with the trustees of the superannuation scheme.  The initial response of the Board-appointed chair (and current Deputy Governor and Head of Financial Stability) was to attempt to close the issues down immediately, without undertaking any investigation. I guess if you don’t turn over stones, there is no risk of finding awkward stuff under them.  Fortunately, other trustees stymied that bid.

After a couple of years’ delay, the trustees somewhat reluctantly came to the view that probably member consent should have sought, and that the decision not to have done so was not necessarily one they themselves would today have made.  But………they weren’t going to do anything at all about rectifying the situation, claiming (on grounds almost totally without foundation) that no one had actually been adversely affected.  These are trustees who, by common law and now by statute, are required to operate in the interests of the members of the scheme (beneficiaries of the trust).  But who could easily have been misinterpreted as operating in the interests of the Reserve Bank (a majority of trustees appointed by the Reserve Bank Board –  the entity that has spent the last few decades providing cover for Bank management).  Under the (relatively) new Financial Markets Conduct Act, superannuation schemes are now required to have an independent trustee –  the one on the Reserve Bank scheme (whatever his other useful contributions) declared early on that he had no desire to be caught in the middle trying to sort out such difficult issues, and (from my memory) has barely uttered a word in all the debates since about these issues.

And what of the FMA?  It is now must be almost a couple of years since the member elevated the issue to the FMA, lodging a formal complaint with them.    And since then the FMA appears to have done almost nothing (there was a meeting with the trustees well over a year ago, but it involved little more than description of the issue –  and at the time the FMA themselves didn’t even seem to have a good grasp on their own act).   Perhaps it is typical for the FMA?  I don’t have anything else to do with them, so have no basis for knowing.  Perhaps there are legal constraints (old legislation) on their ability to actually do anything formally.  But there has been no informal action, moral suasion, either.   Indeed, their inaction could be easily be misinterpreted as having something to do with the fact that the organisation itself (as the Government Actuary) had signed off on the, almost certainly unlawful, rule change.  And perhaps too from the sheer awkwardness of having to investigate serious concerns about an entity associated with their fellow regulator, the Reserve Bank, an entity then chaired by someone who is now Head of Financial Stability (Bascand is no longer the chair, but is still a trustee).  Or from signs that the independent trustee regime they administer seems to be adding only overhead.

I don’t want to bore readers with the details of this particular tawdry episode.

But when we have the new Governor  –  with legislative responsibility only for prudential issues –  lurching from two weeks ago suggesting there were no particular conduct issues in New Zealand, because we had a quite different culture, to last week suggesting that it really wasn’t his call (on an inquiry) but he was sure banks were examining themselves, to news this morning that he and the FMA head had summoned the heads of the big banks to a meeting, demanding they prove a negative (that there is no “misconduct” going on), and (in the FMA head’s case) apparently threatening legal action against those who don’t cooperate, I could only think

Physician heal thyself

or continuing the biblical theme

And why do you look at the speck in your brother’s eye, but do not consider the plank in your own eye? Or how can you say to your brother, ‘Let me remove the speck from your eye’; and look, a plank is in your own eye? Hypocrite! First remove the plank from your own eye, and then you will see clearly to remove the speck from your brother’s eye.

(As background, I am both a member and an elected trustee of this superannuation scheme. I have recorded in the minutes my dissent from the majority view of trustees, and have expressed my own concerns directly to the FMA.  As I joined the Bank, and the scheme, not long before this particular questionable rule change was made, it probably did not materially adversely affect me.)

LVR limits revisited

The Reserve Bank was out the other day with some research on the impact on house prices of the successive waves of loan to value limit restrictions put in place from 2013 to 2016.     It was a rare Reserve Bank discussion paper –  pieces typically designed to end up in a journal publication –  to get some media attention.   That was, no doubt, because of the rather bold claims made in the non-technical summary to the paper

Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent. ,,,,, When it becomes binding, LVR policy can be very effective in curbing housing prices.

Since nationwide average house prices (QV index measure) increased by about 40 per cent over the four years from September 2013 (just prior to the first LVR restrictions coming into effect) to September 2017), you might reasonably suppose that the researchers were suggesting that, all else equal, LVR restrictions had lowered house prices by almost 40 per cent (in other words, without them house prices would have increased by around 80 per cent).  Of course, that isn’t what they are claiming at all.

The paper was written by several researchers in the Bank’s Economics Department (two of whom appear to have since moved on to other things), and carries the usual disclaimer of not necessarily representing the views of the Bank itself.  Nonetheless, on an issue as contentious as LVRs, it seems safe to assume that senior policy and communications people will have been all over the communications of the results.  Even if the Governor himself didn’t see it, or devote any time to it, it seems likely this paper carries the effective imprimatur of the Assistant Governor  (Head of Economics),  the Deputy Governor (Head of Financial Stability) and (at least in the bottom line messages) the Head of Communications too.

In the paper, the authors attempt to identify the impact of the various waves of LVR controls using (a) highly-disaggregated data on property sales, and (b) the fact that shortly after the first LVR restrictions were put in place, the Bank buckled to political and industry pressure and exempted lending for new builds from the controls (even though, generally, such lending is riskier than that on existing properties).  By looking at the relationship between prices of new and existing properties before and after the various adjustments to LVR limits, they hope to provide an estimate of the effect on existing house prices of the LVR controls.

Trying to identify the statistical effects of things like LVR controls is hard, but I’m a bit sceptical of this proposed new approach.  After all, if new and existing houses were fully substitutable a new regulatory intervention of this sort could be expected to affect prices of both more or less equally.  People who were more credit-constrained (by the restrictions) would switch to buying new houses, and those who less affected by the contros (eg cash buyers) would switch more to existing houses.

In practice, of course, the two aren’t fully substitutable, for various reasons (including that most new builds are occurring in different locations –  even in the same TLA – than most existing houses), but in the Reserve Bank research paper I didn’t see any discussion of the issue at all.  If there is no substitutability at all then the research approach looks as though it should be reasonable, but that seems unlikely too.

But I’m more interested in whether the reported results are anywhere near as impressive as the authors claim.

As a reminder, here is their chart of house price inflation developments, with the various LVR interventions marked.


And here is their summary table of those successive interventions.


And here is their summary table of the impact of these LVR adjustments on house prices, as estimated from their model.


My focus is on the last two lines of the table: the estimated percentage effect on the various different intervention on existing house prices in Auckland and the rest of New Zealand  (the three asterisks suggest that the results are highly statistically significant).

Take the initial LVR controls first (which had the added effect of being something out of the blue, shock effects of a tool never previously used in New Zealand).  Recall too that, at the time, the big concern was about Auckland house prices and associated financial stability risks.    On this particular set of model estimates, the effect on house prices outside Auckland –  where there wasn’t a particular problem –  was larger than the effect inside Auckland.  In both cases, the effect (2 to 3 per cent) isn’t much different to previous estimates, or (indeed) to the sorts of numbers that were being tossed around internally before the controls were imposed.  It was generally expected that the controls would have a temporarily disruptive effect, lowering house prices for a while, but the effects would wear off over the following few years. (There are some model estimates on page 9 of this paper the Bank published in 2013.)

And what about the second wave of controls (which tightened financing restrictions on investors in Auckland, and eased them for everyone outside Auckland)?  On these latest estimates, those restrictions had no discernible impact on prices in the Auckland market at all, even though they were avowedly put in place because of explicit gubernatorial concerns about investor property lending in Auckland.  On, on the other hand, the moderate easing in the rules outside Auckland was so potent that it full unwound the price effects of the first wave of controls.

And, finally, the third wave of controls.  These represented a substantial tightening in investor-finance restrictions (especially outside Auckland), and a reversal in the easing (in wave 2) of the owner-occupier financing restrictions outside Auckland.   And yet, even though the rule changes were materially larger for borrowers outside Auckland, there is no estimated effect on house prices outside Auckland at all (even though, in wave 2 the easing in owner-occupier restrictions, now reversed, was supposed to have had a large effect).  And although the Auckland rule changes are smaller those outside there is no estimated effect on Auckland prices at all.  These results aren’t very plausible and suggest that – even if the results are statistically significant –  the strategy they used to identify the effect on prices isn’t that good.

One could also note that if one added up the effects across the three columns (which isn’t kosher, but still…….) the total effect outside Auckland is basically zero (actually slightly positive).  Even in Auckland, the total is about 5 per cent.

One of the reasons why simply adding up the estimated effects isn’t kosher is because everyone has always recognised that LVR restrictions are unlikely to have long-term effects on house prices.  They disrupt established established financing patterns, and thus can dampen house prices a bit in the short-term, but the effects dissipate with time.

In fact, the Reserve Bank researchers illustrate exactly that point in this chart which (if I’m reading them correctly) relates to the first wave of LVR controls.


As the authors themselves observe

Figure 5 plots the point estimates with 95 percent confidence intervals. Overall, the effect of the first LVR policy on house prices occurs within the first three months and is relatively stable over a six-month period. Thereafter, the moderating effect declines somewhat (to around 1.5 percent after 12 months), perhaps owing in part to individuals having saved up the required deposit under the policy and a price differential having opened up between existing and newly built houses.

Any substantial effects on house prices don’t seem to last long.

To be fair to the Bank, and the former Governor, they never claimed house price effects would last for long.  The argument was that LVR restrictions reduced financial system risks by altering the composition of bank balance sheets.  That is another contentious claim, but it isn’t touched on in the current paper and so I won’t deal with it further here either.

So what led them to write (and their bosses to approve) the extravagant claim that LVR policies reduced house price pressures by almost 50 per cent?    It seems to be this

The moderating effect of LVR 3 was clearly seen in Auckland with a 2.7 percent reduction in house prices. This LVR 3 effect is both statistically and economically significant, as during the same period the average house price increased by 5.8 percent.

Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent.


  • as the table above shows, there was no estimated effect on all (from LVR3) outside Auckland,
  • even inside Auckland, and granting their estimates, 2.7 per cent is under a third of pre-LVR price increases during that specific period (the 5.8 per cent that happened anyway, plus the 2.7 per cent they claim to have reduced prices by).
  • as the chart aboves shows, on their own estimates, the dampening effects of LVR controls seem to dissipate relatively quickly (in that case half of the effect had unwound within 12 months).
  • the estimate seems to take no account of the ongoing house price inflation outside the arbitrarily chosen period they measure.

Contrary to their claims, LVR policy is not very effective in curbing house prices.  Indeed, its staunchest advocates never really claimed otherwise (for them it was mostly about financial stability), which does leave one wondering why today’s Reserve Bank management are publishing such overblown (and undersupported) claims to be made.  As I noted earlier, over a period when nationwide house prices rose by about 40 per cent, this latest model suggests no sustained impact at all on house prices outside Auckland –  despite significant interruptions to established financial structures and effective property rights –  and probably quite limited effects in Auckland too.

Overblown claims about what LVR controls can do for house prices (especially with no discussion at all of efficiency/distributional costs etc) risk distracting attention from the real regulatory failures that explains the dysfunctional housing market.  And they also detracting from the credibility of the Reserve Bank, whose legitimacy depends in part of being authoritative when it speaks.



A mis-step by the new Governor

Seventeen years ago, in August 2001, then Reserve Bank Governor, Don Brash gave a speech to something called the Knowledge Wave conference, sponsored by Auckland university.  The speech had the title Faster growth? If we want it (at the link  for some reason it says the speech was given by Alan Bollard, who was Secretary to the Treasury at the time, but it was certainly a Brash effort –  here is the link to the version on his website ).   The speech drew a great deal of flak.  It was two years into the term of the Labour-Alliance government, and it had nothing much to do with monetary policy or financial stability (the Bank’s responsibilities), and instead offered the Governor’s views on what could or should be done to lift New Zealand’s economic performance.

According to the Governor, our culture was a big part of the problem

we seem to have some deeply-engrained cultural characteristics which are not conducive to rapid growth – surprisingly widespread disdain for commercial success, no strong passion for education, and a tendency to look for immediate gratification (as reflected in our very low savings rate and strong interest in leisure) – and it usually takes years, and perhaps generations, to change such cultural characteristics.

and the welfare system

does the present welfare system – with largely unrestricted access to benefits of indefinite duration, and with a very high effective marginal tax rate for those moving from dependence on such benefits into paid employment – provide appropriate incentives to acquire education and skills and to find employment?

we will not achieve a radical improvement in our economic growth rate while we have to provide income support to more than 350,000 people of working age – 60,000 more than when unemployment reached its post-World-War-II peak in the early nineties – to say nothing of the 450,000 people who derive most of their income from New Zealand Superannuation.


Could we, for example, drop all benefits to the able-bodied and scrap the statutory minimum wage, so that pay rates could fall to the point where the labour market fully clears, but simultaneously introduce a form of negative income tax to sustain total incomes at a socially-acceptable level? Could we introduce some kind of life-time limit on the period during which an able-bodied individual could claim benefits from the state? Could we, perhaps, gradually raise the age at which people become eligible for New Zealand Superannuation, reflecting the gradual increase in life expectancy and improved health among the elderly? One of my colleagues has suggested the idea of abolishing the unemployment benefit but introducing some kind of “employer of last resort” system, perhaps run by local authorities with support from central government, under which every local authority would be required to offer daily employment to anybody and everybody who asked for it.

and our schools

It must be a source of grave concern that so many of the people coming out of our high schools have only the most rudimentary idea of how to write grammatical English; and that while Singapore, South Korea, Taiwan, and Hong Kong occupied the top four places for mathematics in the Third International Maths and Science Study, New Zealand ranked only 21st (out of the 38 countries in the study). It can not be good for our economic growth, or for the employment prospects of many of our young people, that, according to an OECD report released in April 1998, nearly half of the workforce in New Zealand can not read well enough to work effectively in the modern economy. It must be a matter for particular concern that 70 per cent of Maori New Zealanders, and about three-quarters of Pacific Island New Zealanders, are functioning “below the level of competence in literacy required to effectively meet the demands of everyday life”.

and excessive regulation

Businesses saw the biggest single problem as the way in which the Resource Management Act was being implemented, and described dealing with that legislation as being “cumbersome, costly and complex”. It should not require two years to get all the approvals needed to set up an early child-care facility catering for only 30 children, or ministerial intervention to cut through the red-tape involved in setting up a boat-building yard. Most of us know similar horror stories.

and our tax system

Another matter relevant to how we might encourage more investment in physical capital is the tax regime. Do we need a substantial change in the tax structure to encourage investment in New Zealand by New Zealanders, by immigrants, and by foreign companies? And if so, what might that change look like? This isn’t the place to go into detail, but it would probably involve a significant reduction in the corporate tax rate (it is disturbing that New Zealand’s corporate tax rate is now the highest in the Asian region). The rate of company tax is rarely the only factor determining the location of a new investment, and indeed it is not often even the dominant factor. But it is a relevant factor, and is one of the issues to look at if we are serious about encouraging more investment in New Zealand.

There were some interesting ideas in the speech. I probably agreed with quite a few of them (I was one of those who gave comments on the draft text, which was even more radical and provocative).  It brought to mind comments about ‘save it for your  retirement”, or “stand for Parliament and make your case” –  which of course Don did a few months later.  But whether you agreed with him or not, whether the government of the day agreed with him or not, it just wasn’t appropriate for an incumbent Reserve Bank Governor.

The Governor is entrusted with a great deal of discretionary power in a limited number of areas.  Citizens need to be confident that the Governor is operating in the public interest, and not to come to suspect the Governor or the Bank of using a very powerful position –  and the pulpit it provides –  to advance personal agendas for policy in other areas.  Same goes for all sorts of key officeholders –  the Commissioner of Police, the Chief Justice or whoever.

That isn’t a novel perspective.  A few years ago Willem Buiter –  chief economist of Citibank and formerly an academic and external member of the Bank of England Monetary Policy Committee –  wrote a useful paper in which(from p286) he urged central bankers to “stick to their knitting”.

The notion that central banks should focus exclusively on their mandates and not be active participants in wider public policy debates, let alone be active players in the negotiations and bargaining processes that produce the political compromises that will help shape the economic, social and political evolution of our societies is, I believe, sound. Alan Blinder described this need for modesty and restraint for central bankers as sticking to their knitting.

As Buiter notes, central banks have often not followed that advice, but

Although always inappropriate, central banks straying into policy debates on
matters outside their mandates and competence is less of a concern when there is little central bank independence and the central bank functions mainly as the liquid arm of the Treasury. It becomes a matter of grave concern when central banks have a material degree of operational independence (and sometimes of target independence also).

Of one example of such straying he writes

Chairman Bernanke may be right or wrong about the usefulness of this kind of fiscal policy package at the time (for what it is worth, I believe he was largely right), but it is an indictment of the American political system that we have the head of the central bank telling members of Congress how they ought to conduct fiscal policy. Fiscal policy is not part of the Fed’s mandate. Nor is it part of the core competencies of the Chairman of the Federal Reserve Board to make fiscal policy recommendations for the US federal government.

And of another

Draghi’s recent address at the Jackson Hole Conference organised by the Federal Reserve Bank of Kansas demonstrates how broad the range of economic issues is on which the President of the ECB feels comfortable to lecture, some might say badger, the political leadership of the EA (Draghi (2014)). Regardless of the economic merits of Draghinomics, there is something worrying, from a constitutional/legal/political/legitimacy perspective, if unelected central bank technocrats become key movers and shakers in the design and implementation of reforms and policies in areas well beyond their mandate and competence.

All of which came to mind when I listened this morning to the interview with new Reserve Bank Governor, Adrian Orr, undertaken yesterday by Radio New Zealand’s Kathryn Ryan.   The interview went for half an hour, and had all of Orr’s accustomed fluency (and not terribly searching questions), but probably half of it was on matters that had really no connection at all to the statutory responsibilities of the Reserve Bank.

He talked at length about climate change and what governments and firms did or didn’t (in his view) have to do.  Some of this no doubt built off his former role with the New Zealand Superannuation Fund –  including the (untransparent) shift in the portfolio away from carbon-intensive assets –  but he is now the Governor of the Reserve Bank, which  has no responsibility for, and isn’t particularly affected by, such matters.  And these are all highly politicised issues.  “The transition needs to start today” he insisted: many people might agree, while others will reasonably take a quite different view, valuing the option of waiting.   The developed world had “gorged on fossil fuel” for 300 years, and now we needed to offer resources to the emerging world.  Probably conventional wisdom at a Green Party rally, but this is from the Governor of the Reserve Bank.

The Governor urged everyone – firms, societies, banks and (presumably) governments to “think and act longer-term”, lamenting the failure of society to take heed of his strictures (and offering no evidence to support his case).   When was the Governor gifted foresight beyond that available to mere mortals? Most humans find the future uncertain, and the far future very much so –  just check out prognostications and concerns from 50 years ago –  and have to plan accordingly.

He seemed to lament the fact that Western societies were growing older –  surely one of the great successes of economic development –  and then declared that it was “fair enough” that the “have-nots” should want structural change now.  How can this possibly be appropriate for the Governor of the Reserve Bank?  (Even if the government of the day happened to agree with him, he is (a) an independent actor, and (b) may well still be in office when the other side of politics once again takes over.)

And, putting a stake in the ground in a hugely contentious issue he declared himself a “huge believer that the country has underinvested in infrastructure”, claimed that our mindset around infrastructure finance was 30 years out of date, and lamented our reluctance to embrace PPPs (while addressing none of the risks of downsides of such structures).

Returning to the Green Party type of narrative, the Governor declared that in his travels he found that the world was looking to New Zealand to show leadership in transitioning to “sustainable agriculture”, declaring how “fantastic” it was when individual farmers had made such a shift.

You might agree with him or some, all, or none of that (I’m in the “none” category myself) but that really isn’t the point.   It would have been quite as inappropriate if he’d been making the opposite points, or repeating the sorts of lines Don Brash was running in 2001 –  championing large company tax cuts, or vocally opposing R&D tax credits.   He has simply gone miles off reservation, nailing his colours to political masts that will make it very hard for him to gain respect as someone operating as an non-political powerful regulator (for now, until the Act changes, the single most powerful unelected official in New Zealand). Perhaps it was a rookie error, and recognising his mistake he can pull his head in, and concentrate on the tasks Parliament has given him, and the need –  acknowledged in his Stuff interview yesterday –  to markedly lift the Bank’s own game.  If not –  if it was conscious and deliberate –  it was a dangerous lurch in the direction of politicising one of the more important offices in our system of government.

I’m not suggesting central banks should never comment on other areas of policy, but they need to be very modest and self-effacing in doing so, and need to tie their comments, and the issues, chosen, very carefully to the Bank’s own areas of responsibilities.  It isn’t, for example in my view the Bank’s place to advocate land use liberalisation, but it is quite appropriate for them to highlight the way that policy choices in that area affect house and land prices, and thus influence the risks on bank balance sheets.  It generally isn’t appropriate for the Bank to take a view on the merits, or otherwise, of particular fiscal or structural policies. But at times the Bank will need to point out the implications of such choices for, say, the mix of monetary conditions.   We should value a good independent central bank, but the legitimacy of the institution –  and its ability to withstand threats to that independence –  will be compromised if Governors play politicians or independent policy and economic commentators.

(Of the bits of the interview dealing with Reserve Bank issues, I didn’t have much to disagree with –  although he seemed far too complacent about the ability of monetary policy globally to cope with the next recession.  There was one proposal that sounded eminently sensible, if challenging to operationalise.  Remarkably the interviewer asked him almost nothing about lifting the Bank’s own game, or the results of that New Zealand Initiative survey on the Bank’s conduct as regulator and supervisor.)

Full marks to the new Governor

Earlier in the week I wrote about the New Zealand Initiative’s report on economic regulators, and in particular the scathing feedback (in survey results and interviews) for the Reserve Bank’s handling of its extensive financial regulatory and supervisory function.

I noted then

One would hope that the new Governor, the new Minister, and the Treasury and the Board, are taking these results very seriously, and using them to, inter alia inform the shaping of Stage 2 of the review of the Reserve Bank Act.  I’ve not heard any journalist report that they’ve approached the Reserve Bank  –  or the Board or the Minister – for comment on the report and the Bank-specific results.   But such questions need to be asked, and if the Bank simply refuses to respond or engage that in itself would be (sadly) telling.

But a reader drew to my attention that Hamish Rutherford of Stuff has indeed approached the Bank.  And got answers.

Adrian Orr, the new governor of the Reserve Bank, has written to the chief executives and chairs of New Zealand’s banks alerting them to a damning report fed by their anonymised comments.

An improbable star of New Zealand finance, Orr, 55, started in the role on March 27, arriving at a central bank which he acknowledges is under fire.

“This place is a diamond, but it needs significant polishing in places,” Orr said in an interview in the Reserve Bank headquarters.

“We need to think much harder about how we behave, how we roll, how we explain, how we do things. That’s a cultural challenge for the bank.”


As well as posting the comments of the report on the Reserve Bank’s internal intranet, Orr had written to bank bosses with the message that: “Hey, this doesn’t print well. We hear you. We need to do something about it.”

He expected that writing the letter and making public statements would elicit “free, unsolicited advice about how this place can do better”.

That is an excellent start: fronting and recognising the issue, to the public, to staff, and to the heads of regulated entities (people who completed the survey).

I’ve been critical enough of the Bank –  and have offered plenty of unsolicited advice as to how the place can be improved (by law and by culture/performance).  I’ve also been a little sceptical of Orr, prior to him taking up the role.   But this is an excellent start.  It is only a start of course, and perhaps he really had no choice but to adopt such an approach in response to feedback so dire.  And actions will need to follow, to change future outcomes. and that will take time and lot of commitment.   But I’m not going to grudge him praise today.

Well done, Governor.