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RBNZ slams Treasury for ‘deep-seated confusion’ behind Treasury's view the RBNZ's bank capital proposals were too high, and it should've waited for a deposit protection regime to be developed before making a final decision

RBNZ slams Treasury for ‘deep-seated confusion’ behind Treasury's view the RBNZ's bank capital proposals were too high, and it should've waited for a deposit protection regime to be developed before making a final decision

A spat between two government agencies over major reforms aimed at strengthening the financial system and protecting bank depositors has been revealed.

Treasury and the Reserve Bank (RBNZ) have been at odds over the relationship between new bank capital requirements and a proposed deposit protection regime.

A swathe of documents, released by the RBNZ on Thursday, shows it wrote to Finance Minister Grant Robertson on October 8 to air “serious misgivings” about Treasury’s “flawed and misguided” advice on how decisions on the two changes should be coordinated.

The RBNZ on December 5 announced banks have to hold an additional $20 billion of capital, with the requirement being phased in over seven years. 

Meanwhile Treasury continues to consult on the design of a deposit protection regime, as a part of its review of the Reserve Bank Act. The regime will mean that if a bank collapses, a fund that banks will pay levies into will be drawn down on, so people with money deposited in that bank can get up to $50,000 back.

According to the RBNZ, Treasury was concerned about the RBNZ finalising its bank capital rules without having regard for the deposit protection regime being developed. has asked Treasury for a copy of the advice it provided Robertson.

‘Deep-seated confusion’

The RBNZ's October briefing said Treasury suggested the capital review shouldn’t have proceeded on its “current basis”. It was afraid requiring banks to hold as much additional capital as proposed by the RBNZ would affect their abilities to minimise losses during a time of crisis.

The RBNZ’s financial system policy manager, Ian Woolford, slammed this rationale.

He told Robertson: “There is deep-seated confusion in the Treasury briefing about the trade-off between capital and crisis management policies…

“‘Bank capital policy’ is the fence preventing bank failure and ‘bank resolution’ is the ambulance at the bottom of the cliff. These are both necessary policies and complementary. They are also distinct policies…

“They each serve different purposes.”

Woolford said there was “unfortunate confusion” in the Treasury briefing over capital instruments.

“Treasury implies that funding provided to banks by way of bank capital replaces and crowds out funding that is potentially valuable in resolution,” he said.

“Treasury then goes on to say that the Reserve Bank should consider lower capital requirements because the funding is needed for resolution (this is like saying the fence should be taken down because the metal is needed for a high-spec ambulance).”

‘Serious practical objections’

Woolford said it made sense for crisis prevention to be prioritised above post-disaster clean-up.

Even if the RBNZ accepted Treasury’s “unconvincing and overstated” “conceptual linkages” between bank capital and bank resolution, “there would be serious practical objections to delaying the finalisation of the Capital Review to such an indeterminate date and setting aside our existing mandate to maintain a sound and efficient financial system”.

Woolford pointed out that while the RBNZ had done four in-depth rounds of consultation on bank capital, proposals around deposit protection were still “very high level” and needed “extensive development and calibrations”.

His comments align with those made by RBNZ Governor Adrian Orr on December 5, when asked him what bearing work on a deposit protection regime had on the RBNZ's final bank capital decision (watch video at 28min 59sec). 

Costings 'simplistic'

Woolford told Robertson: “The sweeping assertions and mischaracterisations in the Treasury briefing are too numerous to deal with in this short briefing.”

He indicated that Treasury may have joined the choir of mainly bank stakeholders concerned about the cost of the RBNZ's capital proposals. 

Woolford said: "Simplistic assessments of relative costs can mislead and confuse, especially with respect to complementary policies (i.e. trading off capital for crisis management policy).”

The RBNZ did in the end decide to take a softer approach than proposed in terms of what the additional capital banks need to hold must be comprised of. It also extended the timeframe banks have to meet new rules and released a detailed cost/benefit analysis.

While Treasury advised Robertson on the intersection between bank capital and Reserve Bank Act changes, Robertson only has the power to make decisions on the latter. The RBNZ operates independently of the government and did the bank capital review in its capacity as New Zealand’s banking supervisor, responsible for maintaining financial stability.

Meanwhile Cabinet is expected to make a decision on the design of a deposit protection regime by mid-2020. 

Decisions are yet to be made around the nature of products deposit protection will cover, the amount and nature of prefunding the scheme will need from the industry, the conditions for the government funding backstop, where the scheme will be located, and how it will be governed.

Treasury will also continue to consult on the possible role of depositor preference, where preferred depositors’ claims are paid out before the claims of other unsecured creditors in the event of a liquidation.

Robertson echoes RBNZ’s analogy

Asked by on Wednesday whether the bank capital decision had any bearing on his decision to set the deposit protection limit at $50,000, Robertson said, “Not particularly”.

He said this level was chosen as it would fully cover 90% of depositors.

When asked on other occasions about the link between bank capital and deposit protection, Robertson has used the ‘fence at the top of the cliff, ambulance at the bottom’ analogy the RBNZ uses to highlight their different functions.

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Yes, Wellington is a mess. Bad governing and confused bureaucracy.
Lobbyists, activists and special interest groups have a field day

Lookout for bad legislation and rubbish laws.

Partisan nonsense. (how did your reading go, HT? zero, I'll be bound. The requirement for ignorance always demands zero information-garnering).

Actually, the comment re Treasury is correct. Deep-seated confusion covers it nicely - as it does most economics-trained commentators. We were in a period where growth could be had, and we bet on increasing growth. We assumed this could/would always continue.

Unfortunately, this was an energy-and-resource issue within a bounded system (a finite planet) and now the growth opportunities are over. (The physically-based ones, at any rate; you can grow your virtual betting indefinitely, just don't expect to cash those bets in.) So very rapidly interest-rates have to trend to zero, then below (it's the only form that fits the physical underwrite remaining). So too, bets on the future have to be realigned with the (dwindling exponentially) ability of the future to underwrite. So 1:1 ratios will happen, if the system doesn't fail first.

No surprises really. In May 2018 senior government minister Phil Twyford identified treasury analysts as 'kids, fresh out of university, completely disconnected from reality', when they challenged kiwi build projections.

What a bunch of inept political cowards the government are. They looked pretty good during the 100 day plan ticking off things that produced significant changes. What happened? Did they realise they were in government and what they did could actually change things and agitate the boomers and asset owners in the electorate? They are fast becoming national lite with some feel good policies for the boomers. Be brave and make some real changes for people still renting or relying on wages for their income, show them their vote matters and then maybe they will get out and vote for you.

Anyway enough of my rant, credit to James Shaw who's still pushing contentious policy he believes in.

What happened? Winston happened!
NZ is probably too small for MMP to work property. It struggles in larger places like Germany. So is it any surprise labour have had their policies blunted?

Sure, some of it's Winston (eg capital gains and limiting of climate change polices) but I don't think Winston would be killing everything. Delays infrastructure spend ups, reducing immigration and this case of Robertson letting treasury fold under pressure from Aussie banks are unlikely to be from NZ first or if it is Labour could stand up to them and tell the electorate its NZ First fault we cant do this.

Blunted policies? You would prefer a minority to dominate the majority? Who would you choose as your benevolent dictator?

Blunting policies so that a majority of the electorate agree with them is the best part of MMP, it slows the rate of change perhaps, but we have longer lasting more considered change. A Labourite might complain that Winston is holding them up, but i bet they are happy United Future and the Maori party stopped National from gutting the RMA.


Treasury sucking up to banks: how unexpected

The simple fact of the matter that the RBNZ cant ignore is the deposit insurance scheme was announced 13 days after the RBNZ Capital proposal were announced. No submission factored this in.

I think Treasury are right. We can argue about whether its about avoiding failure vs containing a failure but the simple fact is reducing the chance of a failure has a direct impact on how much a depositor should be willing to pay to insure against it.

I'm concerned the RBNZ (who license insurers) doesn't get this simple point.

These things need to go hand in hand

“‘Bank capital policy’ is the fence preventing bank failure

Hardly, a robust barrier:

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

A load of gibberish from Treasury. I thought they'd be too busy preparing the next series of leaks to embarrass the Government, and then lie about in a failed cover up.

Perhaps Treasury could work on deflating their massive egos and do some work for a change.

I know people who work in Treasury. They tell me it's full of incompetents and is often shambolic. This and other news items confirms my suspicions...

Do we pay these people big munny..., if so can we do it on a results based scenario.


Father Christmas.


The gift of Baubles, Bangles and Beads......and please rein in the Reindeer.....Doner and crapping on our watch...while you are at it...this Christmas.
Give to Charity.... Let em eat Cake, this Christmas, wiv a little Icing on the TOP.
Orr perhaps we TAX the rich and ridiculous blowhards....not the poor Savers...who just wanted a little times gone Bye.

So the dilution by RBNZ must be under pressure from treasury.

Real shame.

Are Treasury worried that their tax harvest may be sub maximal, or that they are just confused by this funny munny stuff? Or are they argueing about the best way to boost house prices?

Just another example of entropy .

I think the treasury has a point, regardless of whether you believe in the costs estimates from the higher capital requirements there will be somewhat of a double up f you then add on additional insurance costs. From the view point of depositer you are now protected against a '1 in 200' year event due to higher capital requirements plus aparrantely 90% of the deposits will then be covered by a government guarantee.
Term deposit returns might start to look more like government bond returns... Yikes

It (Treasury) was afraid requiring banks to hold as much additional capital as proposed by the RBNZ would affect their abilities to minimise losses during a time of crisis. what? I must be misreading that, because it almost sounds like treasury is worried about the bank losses - they must mean the governments ability to minimise government losses.

Munny is straight forwards. It is the bent Banks and misguided Treasury and usury Officials that have their hand in the Till. that is the problem.

Until we resolve all the thieving and leverage positions of the rising property markets against the poor taxpayers, there will be no simple affordable bits of land, shacks and other nicked nacks, until the landed Gentry are sent a bleedin great taxation and Taxinda Bill and backdate it to other Key players who knew how to massage the systems to their own Glorified Benefit.

It is Christmas after all. And they have got most of it already, plus GST, minus Interest Rates, and compounding delivery features, not with standing.
Oh and Those Millionaires, owe a great debt to Mankind, Jesus would have been so proud, over 2019 years later.

I could rant on some more, but some will understand, some will deny their place in History, some will play the War Games and kill all those who oppose em... Communication is a wonderful thing these days of Carols and rocking the Manger, but hollow it out and you get left with right wing flights of fancy, all the way to the Cayman Islands and Awkland Houses and other Tax Havens of our Dear Landed Gentry, not forgetting that does include a few Dames these days and a few Princes of Edwardian Times......who had their cake and and abused the system mightily.

Nearly the end of 2019.....time for a New Year, a New Regime, a New NewZeal-and and a fair deal for one and all. Perhaps Jacinda could learn from passed miss-takes.

Till we meet again.........Keep them Tills a poppin..... Keep on thinking Interest is worth having, keep on trucking, keep on driving them 4X4's. Cough Cough.

Time for a Climate Change...too.

Father Christmas and the Dear Lord be-Jesus, Here we go again.

Alter Ego,

"Munny is straight forwards" "passed miss-takes". Did you perhaps mean; money is straightforward and past mistakes?

You wrote; "I could rant on some more, but some will understand". I am afraid I am not one of them. I think you must have started your Xmas celebrations a little early.

Can the Reserve Bank replace our government with a statutory manager?