Scoop Election 08: edited by Gordon Campbell

Gordon Campbell on banks passing on their own costs of reform

May 11th, 2012

The global financial system seems to be once again (sort of) in crisis mode. Greece is heading for fresh elections and to (maybe) an eventual exit from the euro, France’s new leader is trying to add some face-saving growth policies to the package of austerity measures co-authored by his predecessor and by Germany’s Angela Merkel, and the Irish public seems understandably confused about its May 23rd referendum vote on the latest version of euro fiscal governance – which the Germans have already postponed enacting anyway, no matter what the Irish finally decide to do. Europe is, in other words, in its usual state of being somewhere between meltdown and muddling on through.

New Zealand meanwhile seems to be doing little more than crossing its fingers, and putting its head on its knees. Last week, Reserve Bank governor Alan Bollard told Parliament’s finance and expenditure committee that banks here should “brace for crisis”: because of those danged Europeans and their wilful ways:

“Their banks haven’t raised more capital and their governments haven’t, in many cases, done reforms.” Therefore the European problems had not been solved, Bollard said…..That would lead to ongoing pressure on bank stocks, bond yields “and more importantly for us, we do have to be alert of the issue of global funding markets going back to the sort of freeze that we saw a few months ago”. New Zealand banks were potentially exposed to European long term secured funding….

That being the case, why is the Reserve Bank letting the banks drag their feet on the implementation here of the Basel III banking reforms that were supposed to be the safety mechanisms devised after the last global financial crisis and (b) if the reason for delay is that our banks are so financially strong that we needn’t worry all that much, then why are bank economists such as ANZ’s Cameron Bagrie saying that the banks should just pass the costs of compliance with the Basel III banking reforms onto the public? Because that’s what Bagrie told RNZ earlier this week:

A previous approach, Basel II, allowed banks to invest in some risky securities, including sovereign debt, as though they were risk-free, a practice since seen as a factor in the global financial meltdown. Now banks look set to be asked to maintain higher levels of equity capital, with an added buffer, and a minimum limit for equity as a proportion of total assets.

Mr Bagrie says the costs involved need to be passed on to borrowers if returns to bank shareholders are to be maintained.

That’s outrageous, given the profits that the Aussie-owned banks are plundering from New Zealand, and given the costs to the taxpayer of bailing out the economy in the wake of the last international round of bank-fuelled greed. Surely, the banks themselves should be paying the costs of putting their own house in order. Not that the RB, for all of Bollard’s vowed advice to brace for crises in Europe, is requiring them to do much, any time soon.

The Reserve Bank has pushed out its timelines for the introduction of two key new regulatory initiatives – the Basel III global capital adequacy standards and banks’ pre-positioning for its Open Bank Resolution (OBR) policy after consultation…. On banks’ pre-positioning for its OBR policy, the Reserve Bank now says all registered banks with retail funding of more than NZ$1 billion, which ranges from the country’s newest bank The Co-operative Bank all the way up to the biggest bank ANZ New Zealand, must have OBR functionality in place by June 30, 2013. Previously the start date had been the end of 2012.

What the OBR policy does is to enable investors to get access to their money out in the event of a bank failure or an insolvency, or in the event of the putting in place of statutory managers.

The key feature of the policy is that creditors – including depositors – are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can quickly reopen with the unfrozen or accessible portion of funds guaranteed by the government to avert a further run by creditors. The idea is creditors’ additional funds can be unfrozen at later dates as the final losses are determined.

Sounds like a good idea. Sounds like something that, given the current mood of global uncertainty, might be a good thing to rush into place – and not, as planned, to delay the OBR implementation. Delay really means that the RB and the government – are gambling that if anything goes pear-shaped in the meantime, the taxpayer will be there to pick up the tab:

The Reserve Bank’s move to get banks to pre-position for its Open Bank Resolution (OBR) policy means there is now less expectation the government would use taxpayers’ money to bail out one of the country’s major banks if it got into strife and more pressure for the Australian parent bank to cough up to stabilise its New Zealand subsidiary, says international credit ratings agency Moody’s Investors Service.

Marina Ip, the Sydney-based assistant vice president of Moody’s financial institutions group and sub-sovereign group, told that the OBR policy, or living wills, meant that instead of the government being the one expected to bail out a bank if it gets into trouble, the OBR policy “clearly outlines” an alternative step that could be taken in the event of a bank failure whereby shareholders and debt holders – working up through subordinated to secured and senior debt holders – would pick up the tab.

As’s columnist Gareth Vaughn has also indicated, the RB appears to have listened to the lobbying of the NZ Bankers Association which didn’t really feel there any justification for the OBR policy or for the Basel III banking reforms.

In a letter available here on the RBNZ website, the RBNZ explained why it will be (a) delaying and (b) only partially implementing the Basel III requirements.

The two most notable departures from the Basel standard and from the Australian Prudential Regulation Authority’ s requirements are:

Our intention [is] not to impose a minimum “one-size-fits-all” leverage ratio.
Earlier implementation of the conservation and countercyclical buffer.

Love that move away from a ‘one size fits all’ requirement on capital adequacy. Every bank, it seems, will be able to make their own case for varying in compliance. So, despite the New Zealand banking system’s vulnerability to the state of global financial markets, the pace and the content of banking reform in this country is being driven very much by the wishes of the banks who – if you can believe Cameron Bagrie – are planning on passing the related costs of compliance with international best practice onto you, their customers. Have a nice day.


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    1. 7 Responses to “Gordon Campbell on banks passing on their own costs of reform”

    2. By Grant on May 11, 2012 | Reply

      John Kay has a very good article saying that much of the problem is because regulations and regulators force banks to fit one mold only

    3. By Graham Dunster on May 11, 2012 | Reply

      The John Kay article is indeed interesting. I’m a little confused as there is a Co-operative Bank in existence in the UK so I don’t understand why they should be precluded from upscaling to Lloyds TSb levels.

    4. By Joe Blow on May 11, 2012 | Reply

      I’d say they’re delaying the implementation of the new policy because they’re afraid of what it will do to economic growth. The banks will pass on the costs in the form of higher interest rates. They can’t offset this in most countries because interest rates are generally at near zero overseas anyway. The NZRB could arguably do this easier than elsewhere.

      So they seem to be unwilling to implement the very policies we need to create a safer banking system because they’re afraid it will deepen the recession. Yeah, they’re still just holding their breath and crossing their fingers and hoping things will improve… It sounds like a rock and a hard place to me. Pretty grim really…

      Macroeconomic Impact of Basel III

    5. By jm on May 16, 2012 | Reply

      There are a couple of things that Gordon fails to mention or doesn’t understand. Firstly the amount of capital available to fund the capital requirements of banks in New Zealand is constrained and largely has to be provided by the deeper and more liquid Australian market. NZ Banks in competition for these funds with both their Australian parents, and other investments. If the returns from the NZ banks reduce due to changes in regulations it will almost guarantee a reduction in capital available to NZ banks. This will then decrease the amount they can lend and hence the impact the wider economy. There is nothing outrageous about this its a fact that we can’t avoid.

      Otherwise Gordon didn’t mention one of the major features of the OBR regime. If one of the major banks gets into trouble the RB will have the option of invoking a rule where by the depositors of potentially ALL NZ Banks will automatically receive a haircut on their savings. This mechanism will be effectively used to re-capitalise the at risk bank. There are a couple of major issues with this proposal that the NZBA and others have noted. Firstly it is likely to increase the cost of funds for Banks in wholesale markets because investors will price the extra risk of loss. In addition there is a strong possibility that public knowledge of the possibility of the RB invoking a haircut will lead to a run on a at risk bank (and potentially all banks) thereby increasing the chance of failure. The RB is leading the world with this set of regulations. Unfortunately one of the things we can say with certainty from the GFC is that you have to be careful about the unintended impacts of regulation (or lack there of)

    6. By Draco T Bastard on May 17, 2012 | Reply

      Much better idea. Shut private banking down and put it in the hands of the state. Gets money moving, removes the dead weight loss of the banks profit and removes the risk as well (to be more precise, spreads it so thin no one will notice it’s there while having the benefits distributed to the community rather than gobbled up by the banksters).

    7. By Joronda on May 21, 2012 | Reply

      There is no quick fix for the Banking industry; and there must be room in a democracy for new Banks to set up if they can identify customers who may wish to support them.

      Banks like to earn commissions/fees from turning over money quickly, and have moved away from long-term loans that provide stability to the economy. 3-5% interest for 25-40 years with 25% deposit used to, in the 1950’s and 1960’s, keep a brake on inflation.

    8. By Joronda on May 21, 2012 | Reply

      When rich men make laws that disadvantage the working class, revolution appears on lips and unrest spreads.

      The NZ Public Servant have elevated their pay to $9.92 per hour above the working class, and it is very difficult to understand WHY. Why should mere servants in air-conditioned offices, get paid more than those at the coal-face earning the export dollars that allow Kiwis to inport overseas goods.

      30% of Public Servants should re-trained into the export sector, so NZ can boost export income.

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