Adrian Orr says the RBNZ is 'monitoring' the banks to assess any degree that they might be 'front loading' the central bank's upcoming capital proposals; says bank customers should 'question' their banks on issues of competition

Adrian Orr says the RBNZ is 'monitoring' the banks to assess any degree that they might be 'front loading' the central bank's upcoming capital proposals; says bank customers should 'question' their banks on issues of competition

Reserve Bank Governor Adrian Orr has launched a broadside attack on the country's big banks and he says the RBNZ is "monitoring" their behaviour to assess the degree of any "front-loading" of the central bank's upcoming capital proposals.

Orr launched his attack in a speech in Auckland on Thursday, during which he encouraged all bank customers "to question their banks on issues of competition".

And in a wide-ranging address Orr also stated he thought it was unlikely that the RBNZ would have to use "unconventional" monetary policy tools as the usual monetary policy tool, the Official Cash Rate gets ever closer to zero. Previously he has appeared to indicate this was a possibility.

The RBNZ has been consulting over proposals for banks to hold significantly more capital. The banks have been strongly resisting this.

Previously the RBNZ has indicated that its final decision would be out in November. However, Orr confirmed publicly for the first time that the decision will not be released till December.

"Whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace. But we will be talking more and better quality capital," Orr said.

"How have some lenders (banks) responded to date? Many of the large banks have spent the past 10 or so years lending aggressively to households and the dairy sector during the good times," Orr said.

"They have also spent the last 12 months or so revisiting this wisdom, and have been raising their lending margins and/or making credit much harder to access for some customers – especially rural customers."

Orr said such bank activity was "pro-cyclical, fair weather, behaviour that leads to misallocated capital, industry booms and busts, and larger economic hardship on broad society – not the bank shareholders themselves".

He said that over the last 12 months or so - as the RBNZ had been working with all stakeholders on its capital proposals - it had reduced the Official Cash Rate by more than the banks’ estimated costs of the higher capital requirements.

"Yet, for some sectors of the economy, such as agriculture, their borrowing costs have risen.

"This can only happen if banks are significantly raising their margins," he said.

"This is not a sign of long-term thinking when it comes to bank borrowing and lending," he said.

"...And it is not a sign of a highly competitive banking services in core sectors of the New Zealand economy.

"We are monitoring this behaviour, to assess the degree of any ‘front-loading’ of our capital proposals, and I encourage all customers to question their banks on issues of competition," he said.

Orr's comments came a day after the RBNZ had left the OCR unchanged at 1% - the level if hit in August after the RBNZ stunned the markets with a 50 basis points cut.

Orr said that when the RBNZ  made the August announcement it was "rightly challenged" by some commentators as to whether it knew something more than the conventional economic indicators had been showing about the state of the economy.

"Our answer remains – no we don’t. We operate in a transparent manner with primarily public data, but it is our job to be forward-looking.

'Pleased' with OCR cut outcome

"In making our decision, we assessed that the impact on the New Zealand economy from slowing global economic growth and persistently low inflation necessitated further monetary stimulus – so as to maintain our inflation and employment objectives. We also judged that it would be better to move early and large, rather than risk doing too little too late. A more tentative easing of monetary policy risked inflation expectations remaining stubbornly below our inflation target, making our work that much more difficult in the future."

He said the RBNZ was "pleased" with the outcome of its August decision to date.

"Interest rates have declined across the board, as retail banks have passed lower lending rates to many businesses and consumers. The New Zealand dollar exchange rate also eased, and the cumulative impact of the easier monetary conditions is now working through the economy. Lower interest rates alter peoples’ investment decisions, especially with the confidence that interests rates will stay low for a long time ahead."

On the question of the possible reduced effectiveness of the OCR as it heads closer to zero, Orr raised the subject again of the possibility of the RBNZ having to use "unconventional" monetary policies, such as quantitative easing.

"The obvious challenge for many central banks, including us, is that the decline in the neutral rate means we have less room to manoeuvre our policy interest rates without concern for the zero per cent lower bound. What happens if we hit zero? Should the OCR go negative, and/or should we embark on direct asset purchase programme, and what other monetary policy strategies could be implemented?

"We are currently thinking hard about these questions, because it makes sense to do so as a precaution – it’s best to put the roof on when the sun is shining. Our current view is that we are unlikely to need ‘unconventional’ monetary policy tools. But we would be remiss not to be prepared."

Call for Government and business spending

Orr again put in a plug for businesses and the Government to invest more to help stimulate the economy.

"The friends of central banks are government fiscal policy (taxes and public spending and investment) growth supportive structural policies, and the business confidence and capability to invest in productivity-enhancing infrastructure.

"The good news for New Zealand, unlike many other OECD economies, is that our government’s books are in good shape and there is already a strong fiscal impulse underway from public spending and investment. We have the trifecta of sound government finances, clear infrastructure demands, and low hurdle rates for investing.

"The same can be said for corporate balance sheets in New Zealand, with relatively low levels of debt, and a strong demand for goods and services, our businesses are well placed to perform.

"So what is holding businesses and government back from further increasing investment and expenditure?"

Orr said New Zealand’s economic ‘problem definition’ appears well advanced, and the solutions "sit largely with us as New Zealanders".

"We have the macroeconomic stabilisers in place - well-established monetary policy practices and sound long-term fiscal parameters. However, there remains a loud call from all quarters of the country for leaders to better signal investment intent, and ensure we have the policy and goodwill to facilitate access to capital and resources to execute.

"This call for investment-intent is to all collectively-owned (e.g., Iwi), Crown-owned (i.e., central and local government), and co-operatively owned (e.g., traditional primary sector) sectors. It is not just to traditional businesses, or any one party.

"Easily said, harder to do without a clear desire to work together over an agreed horizon."

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Competition between banks would be enhanced with the introduction of bank-account number portability.
It's all too hard for many customers to contemplate moving bank when all direct debits and periodical payments etc. have to be advised to counterparties to allow the transactions to continue unhindered.
Just like moving your phone number from one carrier to another, we should be able to move and retain our bank account number from one bank to another. How hard can that be!?

The Big Four act like a cartel, with not much difference in products, rates, fees, etc. Customer service has also ceased to be the differentiator. Kiwi Bank has to be supported along with the smaller banks like TSB to grow into good competition, if necessary with some unlevel playing field for them, like shifting of government business, extra capital funding by the government, even tax breaks, etc. But not likely to happen here, I think.

Its probably worst than that. Not unlike Standard Oil; when it was required to be split up to reduce price setting, the split didnt do anything to the change of ownership. While it will always be difficult to prove; without appropriate government intervention, I think you'll find all these blind trusts and nominee companies that own the major of the big four all lead to Rome.

In my humble opinion, I believe there is an opportunity in the market for longer term fixed rates; ie. 10, 15, 20 & 25 years. These could be extremely attractive to home owners, farmers and institutional owners of commercial property. Businesses may be interested in this too. As long as the loans were transferrable, and the rules were fixed, there has to be an opportunity out there for this. The NZ superfund and ACC dont need to draw on all their money at once, so they could be the funders.

I know alot of people of sick of these overseas banks, who change the rules on the way through, and are nothing but fair weather sailors; charting a course to Hawaii or a tax haven elsewhere as we speak.

Now imagine if your bank account number was just your IRD number and a suffix to denote which account.

Great idea! And....if that same IRD number was also an RBNZ savings account. Just pay your taxes from that RBNZ account if need be, or use it to squirrel away Government Guaranteed savings if you wish ( forget this Bank Guarantee of Private Banks stuff - all too hard and pointless. Just give us an RBNZ account if we want safety at a lower yield). As I said, "How hard can it be!"
(PS: It's the ultimate stick. "Buck up your ideas, banks, or we'll let New Zealander's bank with us at the RBNZ!" See how they react....)

Nope, if you safe money savings, buy Kiwibonds, or get a safe deposit box. Not the RBNZs job to cater for retail banking.

Great suggestion, But this assumes giving IRD no is compulsory for opening/operating bank accounts, which is not the case.
If IRD no is not given, RWT is set at the maximum rate of 33% and that is it. Banks don't chase customers for furnishing IRD numbers.

Likely to have been changed with the AML/CFT changes I would hope.

It is the other way around.
AML/CFT is focussed on identifying and knowing the customer and their vocation and their tax status in NZ and elsewhere. Many accounts are opened for students/work visa holders as soon as they come in but IRD no is not required. In fact, IRD needs a bank statement showing withdrawals to confirm that the Bank has verified ID before issuing IRD number...

Look at RBNZ lending figures yesterday release: down on last August, despite lower interest rates.
So, in effect, less money creation and money velocity. So Mr Orr is rightly worried, as economy runs on credit and its leverage. Sales trend of Auckland housing is worse in the 12m trend series (12m to end of each month) for last 4m running. Of course Auckland prices are flat as well, so less debt needed to purchase. Buyer deflationary mindset in place

No mention of the tighter credit conditions then? Commercial property loan to value ratios went from up to 60% to under 40%. Plus depreciation allowance cancelled by English. No write down of earthquake strengthening expenses. Oil and gas industry effectively told to close down over the next 20 years under Ardern. Green/Labour and local councils desperate for more taxes any way they can get them. Inept regulation causes long delays and barriers to action. The war on business continues. This is a dangerous road to travel down.

Lack of opportunity and multiple danger signals causes business investment to be delayed. Who would have thought?

Some of those policy changes from the current regime is a problem but private productive investment has been falling as a share of GDP at a steady rate since 2000. Upskilling, technology adoption, R&D - businesses in NZ have always found reasons not to fund such qualitative initiatives.

Foreign capital inflows (pushing up the exchange rate and causing higher house prices which cause local labour to be more expensive), cheap immigrant labour, plus anti-business environment have created conditions that have disincentivised investment in productivity, perhaps?

Just Labour...
Then CGT, then Kiwibuild plus world events was more than enough reason for me to cash out and play the waiting game, till it all comes crashing down.

there is no CGT... it never happened.

The very mention of CGT stopped investment in its tracks.

Except it's not just Labour. It was National before them who also perpetuated the conditions that have disincentivised investment in business and helped push all money into property in search of easy, tax-free gains.

Our own poor policy settings allow locals and foreigners to place bets on asset prices instead of putting that capital into productive sectors.

True story - even Harvard's wealthy endowment fund chose to invest in a piece of land down in the South Island instead of making a quality investment.

"Commercial property loan to value ratios went from up to 60% to under 40%."

Just seeking clarification for commercial property lending on above comment.
LVR's fell from up to 60% to under 40%?

Banks are fair weather friends. So what is new. I am sure the Governor is familiar with the saying..A Banker is one who lends you an umbrella when the sun is shining and takes it back when it starts raining'
Just like Insurance Companies..at the first sign of trouble in any place, they stop selling Travel Insurance to that place.
All a sham. It is a pity that Capitalism, Reasonable Capitalism has not found a Reasonable Banking or Insurance alternative till date. And Central Banks have gone along with all these scams and even helped the bail outs of Banks, which has now become an enshrined rule of National Banking in the name of TBTF.
I am glad Orr is taking some baby steps to confront and confound the Big Banks in New Zealand, but wonder how strong is his will to see these reforms through or whether he will be allowed to, especially with an election coming, which may result in a change of government.
Interesting but troubling times in the Banking and Insurance world.

It is just noise, winds and words. NZ is not an economic powerhouse globally. It has an economy about the size of Phoenix AZ. The mouse roars! Sure the banks might listen along, even meet and have a pow wow, but exactly how do you make them do!

Governor Orr says we should question our bank on competition. Ok, as he is also our banker as well, I ask him about competition. What is he doing to encourage more competition in the market? The answer seems nothing at all.

"Whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace. But we will be talking more and better quality capital," Orr said.

"How have some lenders (banks) responded to date? Many of the large banks have spent the past 10 or so years lending aggressively to households and the dairy sector during the good times," Orr said.

"They have also spent the last 12 months or so revisiting this wisdom, and have been raising their lending margins and/or making credit much harder to access for some customers – especially rural customers."

Orr said such bank activity was "pro-cyclical, fair weather, behaviour that leads to misallocated capital, industry booms and busts, and larger economic hardship on broad society – not the bank shareholders themselves".

And over the same past 10 or so years, the RBNZ cut OCR from 8.25% in June 2008 to 1 0% today, inexplicably chasing the neutral rate down. Cutting rates in half three times was nothing but a debt for lost jobs strategy, which is in the process of self inflicted destruction.

All this goes back to Bernanke. He had a theory. He had an opportunity to test his theory. The results are mixed at best. The wealth gap gets wider. The assets get more expensive. The interest for capital dwindles to negative & no one's got a clue of where to go from here. I think if Mr Bernanke had a couple of different endings in mind he should let us know sooner rather than later, because we're running out of interest of all types & no one's going to make anything shortly.
In fact, now would be a good time for western leadership of all sorts to step up & lead us into a better future, which is quite clear, no one can see from this point at least. Yeah right!
PS: I'm having a love/hate relationship with our new Governor of the RBNZ. This week is love.

Ben Bernanke was a lucky chap, he kept his head. The venerable Viscount Takahashi Korekiyo, whose example Bernanke followed, did not. Monetary expansionism favours the government bureaucracy, especially the military. They do not like it if you later try to take their toys away.

https://en.wikipedia.org/wiki/Takahashi_Korekiyo

What a shame Orr doesn't have his portfolio broadened to include price rigging and front running in petrol and food stuffs.

Costco is on the way...

Foremost, taking lessons from Europe and Japan, I expect bank profitability to decline in a low interest rate environment. Banks will need to retreat into their core profit centres and cull low return products so not every bank will be able to offer a full suite of financial products (colloquially called "customer journeys" or "farming" customers.) In an efficient, open market a traditional bank is just a utility. What would lay the groundwork for open banking would be to have a way for people to identify themselves without needing to return paperwork and to force banks to standardise their products so they where directly comparable across the industry. If "open banking" just means APIs it will fail to have any impact.

Email from bank the other day stating if i wanted to fix longer than 2 years, then an additional margin would have to be added due to the potential impacts of the capital adequacy framework for the registered banks.

Wow, so fast ? Even before the targets are finalised and accepted ? Does Orr know ?