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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