Bank lobby group says 'no thanks' to RBNZ's dashboard disclosure proposal, arguing it presents new, complex & potentially irresolvable issues

By Gareth Vaughan

New Zealand banks have come out strongly against their regulator's plans to enforce its proposed dashboard quarterly disclosure regime on them.

In a submission on the Reserve Bank's Dashboard Approach, bank lobby group the New Zealand Bankers' Association (NZBA) says it cannot support the proposal due to a number of significant concerns. NZBA goes as far as saying if some of the information the Reserve Bank wants included in the Dashboard bank comparison table on its website is included, there's a risk "uninformed users could make inaccurate assessments of a bank’s financial stability thereby introducing the risk of a run on a bank."

"NZBA submits the Dashboard Approach presents a number of new, complex and potentially irresolvable issues. On this basis, NZBA does not support the Dashboard Approach," NZBA says.

Rather NZBA says it supports the Option B put forward in the Reserve Bank's consultation paper, the so-called Pillar 3 approach. The bank lobby group points to the fact the Pillar 3 approach aligns closely with Australian disclosure rules, the country where the parents of NZBA's four biggest members are based. (The Reserve Bank's preferred option is the Dashboard Approach).

NZBA even says retaining the status quo of the existing quarterly general disclosure statement regime is "palatable" to its members. And the bank lobby group also asks that the Reserve Bank undertakes further consultation about the detail of the proposed disclosure, whatever option it settles upon.

'Simpler & more accessible'

Toby Fiennes, the Reserve Bank's head of prudential supervision, says the Reserve Bank is trying to design a disclosure regime simpler and more accessible to retail investors than the existing one. The Dashboard Approach, Fiennes says, is aimed at boosting market discipline, stimulating more interest from depositors and their advisers in the banks, and ultimately boosting financial stability.

"If banks know they're more under scrutiny from the market, they're going to be keener to be safe and show that they're safe," Fiennes recently told journalists.

Among its concerns with the Dashboard Approach NZBA argues the proposed side-by-side comparison of banks’ key financial metrics could lead to inaccurate conclusions about comparability, given the banks’ different sizes and differing accounting policies.

"NZBA submits that few retail investors will understand and appreciate the differences between the structures of the various locally incorporated banks and will therefore be unlikely to properly interpret the Dashboard’s information in light of its wider context. In this respect, the Dashboard Approach is unlikely to achieve one of RBNZ’s key aims of promoting the comparison of financial information published by, and therefore the relative positions of, the banks."

It also suggests the Reserve Bank could make changes to the G1 tables on its website, that provide summary financial information about locally incorporated banks, to make them more accessible. This, NZBA argues, would be a "more pragmatic approach than a complete overhaul of existing processes and disclosures in an attempt to deliver the same or similar outcome."

RBNZ 'publishing information on behalf of banks'

Another concern NZBA raises is that the Reserve Bank proposes to populate the Dashboard, which will appear on the regulator's website, with information received from banks as part of their private reporting to the regulator. Essentially, NZBA says, this means the Reserve Bank would publish information on behalf of banks.

A problem with this is the IAS 34 interim financial reporting standard and director attestations that currently appear in disclosure statements, provide some investors and other users of bank disclosure information "with a certain level of comfort as to the accuracy and credibility of the information published, and that this comfort would likely not be derived from a third party publishing the information," NZBA says.

Another gripe is that the Dashboard Approach wouldn't let banks provide context for the figures and information, with NZBA suggesting a lack of meaningful context or explanatory information could lead to the "misuse and misinterpretation" of data. 

NZBA also suggests shifting to the Dashboard approach wouldn't reduce its members' compliance costs.

"The main reason for this is that for banks that seek offshore funding, some investors, analysts and [credit] ratings agencies will require additional financial information to be prepared rather than relying solely on the Dashboard. In part this will be to provide context and explain the information in the Dashboard, but also to incorporate other information relevant to and relied upon by those parties that will not be included. This will effectively result in banks needing to continue to undertake a process similar to the current disclosure statement regime to prepare and provide the relevant information to these parties, as well as embedding a governance framework to provide comfort/assurance in relation to the information to be published in the Dashboard," says NZBA.

"Therefore, the result that the proposed Dashboard Approach seeks to achieve, providing stakeholders with relevant comparable information while reducing the compliance burden on banks, is not likely to eventuate as a duplicate process will be required."

"Additionally, running this process to complement the Dashboard creates the risk of errors in duplicated information in another format, and leads to the potential for disparity in information available to different types of debt investors (for example wholesale v retail)," NZBA adds.

"Finally, NZBA considers that legal issues may arise as to issuer liability under international legislative requirements (e.g. USA or UKLA [UK Listing Authority]) from incorporating an external web address (the RBNZ Dashboard website) into offer documents." 

 'Retail investors' average financial literacy needs to be significantly lifted'

Other concerns NZBA raises include that the release of information on the Dashboard before approval by directors would raise the question of compliance with director duties and/or other statutory obligations. On top of this there are sharemarket disclosure concerns.

"A key issue with the proposed Dashboard Approach is the timing of its release. Some, or all, of the information contained in the Dashboard could be considered ‘price sensitive’ under registered exchange continuous disclosure requirements (for banks with listed debt or equity instruments)."

"The proposed timing for release of the Dashboard information by RBNZ is ahead of formal bank results announcements and could breach its continuous disclosure requirements unless it simultaneously releases an announcement on the relevant exchange," says NZBA.

For NZBA members with sharemarket listed parents, such as ANZ, ASB, BNZ and Westpac, this would mean simultaneous sharemarket releases would be required by the Australian parents too, which would "make little contextual sense."

And ultimately, NZBA argues, the Dashboard Approach won't result in a significant increase in the number and types of users of the disclosure information.

"In particular, for the typical retail investor average financial literacy, particularly accounting skills, needs to be significantly lifted for this to eventuate. NZBA does not consider that the Dashboard Approach will of itself encourage retail depositors to view, or fully understand, the data published by the RBNZ."

Noting the Dashboard Approach takes a "very different approach" from equivalent jurisdictions such as Australia, NZBA argues it would be preferable for New Zealand's disclosure approach to be "in alignment" with Australia. 

"As such NZBA prefers the Pillar 3 Approach, which is more akin to the Pillar III disclosures made under the Australian regime."

"Additionally, the director attestations included in Pillar 3 provides certainty to parties like investors who rely on the attendant director/management sign-off, responsibility and liability."

NZBA notes the Pillar 3 option retains the ability for banks to provide additional information or context about disclosure information. This, the lobby group says, is critical. In contrast the Dashboard, by removing this ability, carries a "risk of over-simplification which could be potentially misleading."

'Introducing the risk of a run on a bank'

Meanwhile banks, NZBA says, are especially concerned about the Reserve Bank's proposal to publish core funding and mismatch ratio liquidity metrics in either the Dashboard or Pillar 3 approaches.

"In the absence of prescriptive guidelines, consistent methodologies and/or RBNZ accreditation on the calculation of core funding and mismatch ratios, this data has the potential to be misleading. The mismatch ratios in particular are a highly technical area and their calculations are not suited to comparability across different sized organisations. In our view, there is a risk that uninformed users could make inaccurate assessments of a bank’s financial stability thereby introducing the risk of a run on a bank, itself precipitating the risk that RBNZ seeks to mitigate through market discipline," NZBA says.

Additionally NZBA wants an eight week, as opposed to the four week, publishing deadline suggested by the Reserve Bank. 

Consultation on the Reserve Bank's Dashboard Approach closed yesterday (Thursday). The Reserve Bank has said it's aiming to unveil its final decisions in the first quarter of 2017.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

33 Comments

.In a submission on the Reserve Bank's Dashboard Approach, bank lobby group the New Zealand Bankers' Association (NZBA) says it cannot support the proposal due to a number of significant concerns. NZBA goes as far as saying if some of the information the Reserve Bank wants included in the Dashboard bank comparison table on its website is included, there's a risk "uninformed users could make inaccurate assessments of a bank’s financial stability thereby introducing the risk of a run on a bank."

Get real and grow up.

While unsecured lenders (mainly depositors) are the main source of loss absorbing capital, in the event the RBNZ decides to haircut their capital (OBR) to match written down and possibly extinguished mortgage assets after a bank solvency crisis, they need all the information relating to the security of their savings, regardless of whether banks and their guild like it or not.

up
12

Well,

I am no supporter of the banks,but I made essentially the same point in my own submission.

My own,admittedly unscientific research,tell me that the level of knowledge on OBR is minimal and thus, the Dashboard or any other measure,will fail without a widespread and intensive campaign to educate the public on the issue. I am more than a little sceptical that this will happen. I think many would be unimpressed to learn that their Australian relatives' bank deposits are covered up to $250,000,while theirs are not. The public might be further unimpressed to find that NZ is the only developed economy not to have some level of deposit guarantee.

Agree that a load of work needs to be done to educate the public. A lot of hard work, indeed.

But, what does it matter that there is no 'deposit insurance'?
Surely this is what this dashboard is in aid of - to highlight this fact and better inform the creditor public.
Plus, aren't we already self insuring? Our deposit rates are substantially higher than the countries with regulated deposit insurance, so aren't we are being recompensed accordingly through this alone...

In a country dominated with offshore banks, I can't think of any banking policy more risky than offering deposit insurance.

Several points need to be highlighted here; foremost - the banks are private institutions, not publicly owned. They have demonstrated through their behaviour that their first loyalty is to their shareholders, (and there are just four significant ones common to all the major banks) no one else. this leads on to the second point, depositors funds are actually the property of the bank, and while legally the banks may be limited in their ability to prevent a depositor withdrawing their money, they will need time to put any stops in place, and also take the "haircut" to make depositors pay for their (the banks) on poor practices. Note that when the GFC happened and depositors lost their savings, it was the banks who were bailed out, not the depositors.

To the fact that banks are private institutions - where else in any society are private business's able to dip into their clients wealth to protect themselves when they get into trouble? This is nothing more than legalised theft on a grand scale. The partnership between the bank and the depositor is far from equal.

IMHO the law should be changed to make the depositors funds the property of the depositor, not the bank. This would mean the banks are more answerable to their clients and should actually be a bit more careful with respct to their business practices and behavior.

"Note that when the GFC happened and depositors lost their savings, it was the banks who were bailed out, not the depositors."
That is exactly the point of not offering deposit insurance.
As soon as deposits are insured, the financial institution is heavily incentivised to be reckless as it is guaranteed a tax payer bailout.

"Where else in any society are private business's able to dip into their clients wealth to protect themselves when they get into trouble?"
Ahh, pretty much any institution that holds equity/liability of a third party on their books...

"IMHO the law should be changed to make the depositors funds the property of the depositor, not the bank."
That is very different to deposit insurance.
But, valid. However, be happy with significantly lower returns on deposited cash along with higher account costs.
No one gets a free lunch. It all has to be paid for.

"That is exactly the point of not offering deposit insurance. As soon as deposits are insured, the financial institution is heavily incentivised to be reckless as it is guaranteed a tax payer bailout." I'm most definitely not advocating deposit insurance. I'm advocating increasing the power of the depositor in the relationship. For example try re-writing a mortgage document where the Bank becomes the client (reverse the relationship) and rock up to a bank to make a deposit with that document to be accepted by the bank. How many would accept it? Why shouldn't the depositor be able to do that? I suggest that if the banks are more accountable, and legally liable about how they treat their clients, they might reconsider much of how they behave. I agree that there will be increased costs in some areas, but banks already make a lot of money off their depositors funds without it filtering through as interest. This would likely make the sector a lot more competitive too.

""Where else in any society are private business's able to dip into their clients wealth to protect themselves when they get into trouble?"
Ahh, pretty much any institution that holds equity/liability of a third party on their books..."
So any bank? What other business? I take my car to a garage, the ownership is still mine, I don't sign over title. This is about depositors retaining title over their own money.

"For example try re-writing a mortgage document where the Bank becomes the client (reverse the relationship) and rock up to a bank to make a deposit with that document to be accepted by the bank. How many would accept it? Why shouldn't the depositor be able to do that?"
The lender is perfectly entitled to do that. Equally, the bank is perfectly entitled to reject it.

"I agree that there will be increased costs in some areas, but banks already make a lot of money off their depositors funds without it filtering through as interest. This would likely make the sector a lot more competitive too."
Price is set at the margin, so I don't know how this matters at all.
I don't know how raising costs makes an individual bank or industry more competitive. There is no logic in the notion that as costs increase, competition also increases.

Every private institution that has a credit term with a supplier is leveraging their cash liability in the same way as a bank.
If not, they aren't using their money very well.

C'mon Nymad. What bank would accept a contract from a depositor? Let's face it, all the power sits with the bank. Your approach of take it or leave it is what the problem is. We are all essentially required to have bank accounts, all the big banks are pretty much the same, so there is little to no choice. All the power is theirs and they dictate terms. Make the depositors money the property of the depositor and the banks accountable. Level the playing field a little. The banks have manipulated the market, and Governments so that the legislation all sits in their favour, and they resist anything that will change that, the above article is proof of that.

Perhaps banks should offer two types of accounts:
1) a true deposit contract holding funds that must matched 1-for-1 by assets with the RBNZ (cannot be lent out)
2) a loan contract (currently misnamed deposits) which can be lent out.

Depositors could then decide on the risk they wish to take, currently there is not option 1), and we have to lend our deposits to banks who leveraged 10 to 1.

"As soon as deposits are insured, the financial institution is heavily incentivised to be reckless as it is guaranteed a tax payer bailout."

No it's not. How are they incentivised more than now?

They owe the depositor nothing if they go under. So based on that I would say they are already reckless, as their is no comeback on them not to be.

At least with a guarantee the depositor doesn't go down with the bank.

Simple, really.
If you know you are going to be reimbursed for any risk you take, you are intrinsically incentivised to take that risk.
I'm not going to go over it any further. If you don't understand it, read the OBR or any musings on moral hazard.

"They owe the depositor nothing if they go under. So based on that I would say they are already reckless, as their (sic) is no comeback on them not to be."
How are the banks already reckless, exactly? By this logic, all private institutions are reckless. Kinda degrades the meaning of your statement..
Have any failed, or even come close to failing?
Is the RBNZ penalising them for any indiscretions?

"Have any failed, or even come close to failing?"
Yes, Yes, and Yes. BNZ in 1990 is the biggest that comes to mind.

"How are the banks already reckless, exactly?"
The GFC wasn't caused by well structured lending on good investments.
So I ask you - How are they not?..."exactly"

At this point in time a bank can invest in whatever, whenever, with no requirement to notify, inform, or otherwise seek confirmation from the Depositor. The only thing a depositor has is the standard disclosure agreement a bank is forced to provide. Sign that and the bank is in complete control. The only risk to the bank is that they lose "their" money. There is no penalty if they lose the depositors. There is no recourse available to the depositor, in fact the depositor has no power or control at all.

So if there are no penalties tot he bank, no risks to the bank (In regards to having to return a depositors money) - what exactly is encouraging the banks to mitigate the risk to depositors? There is none.

Now, feel free to disagree but to do so,
a) Show me how they mitigate risk in regards to the depositor?
b) Show me how they act more mindfully as a result of no Deposit insurance?

Deposit Insurance does not remove risk from the banks, it removes it from the depositor.

My point was in the present context.
Not even the GFC is really relevant. I don't recall any NZ/AUS banks collapsing/needing bailouts..The government guarantee that was temporarily instituted wasn't even activated then, so not a good example at all.
"Global" is a bit of a misnomer in this case.

I don't know how many banks are in the long term business of losing customer's money. If they were, they wouldn't exist. It is by that very fact that the OBR seeks to leverage.
That is the intrinsic risk to the bank.
Introduce a safety net and that risk is significantly decreased for the financial institution. i.e. they are rewarded for making decisions that sans safety net would be substantially more risky for the long term position of the bank and its customers.
That should be enough to highlight why depositor risk is mitigated. Unless of course you genuinely believe the banks in NZ seek only to exist for the short term.

"Deposit Insurance does not remove risk from the banks, it removes it from the depositor."
Wrong. It subsidises the bank with tax-payer money. At the end of the day it just socialises the risk with no cost to the institution. Thus, the risk is still the burden of the depositor/tax payer, albeit unfairly allocated.

You would do well to also drop the 'depositor' term.
Think of it as 'investor', and it will be a lot easier for you to understand.

"You would do well to also drop the 'depositor' term.
Think of it as 'investor', and it will be a lot easier for you to understand."

I could do that, but then I would be wrong - at least according to my Banks Standard T&Cs. They always refer to the deposit, rather than the investment.

the Australian banks were underwritten by the aussie government during the GFC,

Yes, occasionally the regulator, the Australian Prudential Regulation Authority (APRA) steps in. Sometimes the Australian Government has to act, such as on October 12 2008 when it announced a guarantee on all bank deposits up to $1 million and also guaranteed banks’ wholesale funding. And the reader suspects that the Australian authorities were like a duck – calm and composed above the water with legs going full speed out of sight under the water. But the overall message is clear. Australia’s banks survived the GFC remarkably well.

Correction - Australia’s banks survived the (1st) GFC remarkably well.

Do you really believe that our higher interest rates stem from our lack of deposit insurance? If so,what evidence do you have for that? I would have thought that they reflect the fact that we have to borrow so much of our capital from abroad and this has been the case for a long time.
Is there any evidence that the banks in Australia are lending more recklessly than their subsidiaries here? If one of our Australian banks were to collapse-however unlikely that may be-the government of the day would come under immense pressure to step in as it did with SCF and bail out the depositors. Do you believe that it would just stand back and let the depositors sink? Perhaps,but right now,a lot of people think they would cave in and throw a lot of tax payers money at the problem.

as the RBNZ says depositors do not need insurance because they should be aware of the risks investing their money in the bank, they need to come up with a simple chart to show what the risks are.
many do not even see themselves as investing, rather they see it as a big piggy bank with their money safely tucked away.
imagine the shock and outcries if an OBR ever happen, I would suggest some RB heads would need police protection

My guess is that only about 0.1% of the population is aware that depositors are merely unsecured creditors. Somehow banks give the impression that the money deposited with them is held in trust and invested on the depositors' behalf as responsible intermediaries. So blowing their cover is interesting.

Of course, if the RBNZ were actually to do their job they would make exactly that change as Mervyn King suggested. They would also insist the NZ branches be real independent subsidiaries, with at least 25% listed on the NZ stock exchange. So ANZ NZ would really be separate from ANZ AU, not the smoke and mirrors and tax arbritrage we currently have. However, the RBNZ are reluctant lickspittles, so their attempt to introduce a little light should be supported.

I don't know if the heads of finance companies that went belly up needed protection.

Maybe that's why some of them are in prison? Protection....

'Retail investors' average financial literacy needs to be significantly lifted' says the NZBA.

Perhaps a good starting point might be for the banks to explain simply to their customers how they "create" deposits at the stroke of a keyboard and blow up the housing bubble as it makes them lots of easy money.

They are not simple intermediaries between depositors and borrowers..

Banks fighting better transparency and more regular reporting? Why would anyone be surprised by this?

Good question..

Meanwhile, the RBNZ has just released this - https://youtu.be/08OuDzDZZ5o

One of RBNZ's three regulator "pillars" - disclosure- has been comprehensively undermined by the NZBA

When Aussie Bank rules are implemented here by their subsidiary banks (TD withdrawal notice), why should the deposits with the Banks here owned by Aussies, not insured automatically up to $250k ? Seems fair to me.

Does use of the term "deposit" or "savings account" or indeed "current account" not imply that the money is held in trust on behalf of the depositor, rather than becoming the property of the bank? Is not the use of language in reality wilfully and intentionally misleading?

The world of banking has lots of surprising answers to simple questions, and there are lots more:
Can a bank create an asset out of nothing and lend out cash against that newly created asset?
Can an auditor sign off that a book-entry created by a few keystrokes is an asset?

Can an auditor sign off that a book-entry created by a few keystrokes is an asset?

I guess they must and central banks must come to realise they are not central to credit aggregrate growth or contraction for that matter.

Money is instead “money”, where all the various forms of those bank balance sheets become the conditions that drive either monetary growth or contraction. Indeed, it is in many ways impossible now to separate money from credit, a further complication that has only rarely been considered.

The problem from a monetary policy standpoint that might ever acknowledge this arrangement is that it diminishes greatly the standing of monetary policy and the central bank. To realize that banks are at the center rather than central banks would be for monetary policy to be reduced to one input among many; and, more often than not, especially the past few decades, an unimportant one. Read more

See "Accounting Perversion in Bank Financial Statements - Root Cause of the Ongoing Global Financial Crisis" by Michael Schemmann

Thank you. I have yet to get a copy, electronic or otherwise at this point, but will endeavour to do so.

But without knowing the exact content it caused me to think about "repo" agreements and how they are accounted for. Especially the sale of collateral supposedly held against a short term reversible loan to one party to a third party. Financial expediency in respect of what defines money and it modern fungible surrogates drive the rules of accounting in this instance rather than the traditional laws associated with property ownership. Read more, including the embedded links.

Thank you Peri.

Demand deposits referred to by the public as “cash in bank” is recorded and reported by monetary financial institutions (MFI) in units of account by double-entry bookkeeping in a process which the MFIs call “lending ” — but which is effectively a nullity — by debiting loans receivable and crediting demand deposits.

These so created units of account are then denominated at will in dollars, pound sterling, euros, etc., depending on the terms of the documentation or underlying promissory note, or whatever is the legal document giving rise to this type of “lending,” using whatever is the name of the currency in the jurisdiction in which it takes place, but legal tender the “demand deposits” are not.

Banks do not have pre-existing funds in the form of legal tender to lend, except in miniscule amounts relative to the size of their loan portfolios. In other words, banks create demand deposits out of nothing, and it therefore remains a nothing. The malpractice continues because public accountants as auditors sanctify the aforementioned practice by “certifying” the banks’ financial statements, provoking credit expansion, moral hazard, asset bubbles, liquidity-stressed financial markets, bank runs, and eventually global financial crises.

This claim certainly calls into question the RBNZ's want to persistently peddle this inexplicable self -serving fiction:

However, banks in New Zealand appear to be relatively efficient in the core intermediation role of receiving money in the form of deposits and recycling that money via loans to creditworthy borrowers. Read more page 35 (37of 60)

It certainly does not conform to realistic central bank thinking.

“In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank’s liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet.” Read more