Deputy RBNZ Governor Geoff Bascand: The RBNZ isn't willing to take on the 'additional risk' of going into negative OCR territory; Banks are well-funded for now but future uncertain

Deputy RBNZ Governor Geoff Bascand: The RBNZ isn't willing to take on the 'additional risk' of going into negative OCR territory; Banks are well-funded for now but future uncertain

By Jenée Tibshraeny

Deputy Reserve Bank (RBNZ) Governor Geoff Bascand says banks’ computer systems aren’t set up to deal with negative interest rates.

He compared the situation to that at the change of the millennium when people were concerned about how IT systems would respond to the date ticking over from ’99 to ’00.

The comment follows the RBNZ earlier on Monday announcing the Official Cash Rate (OCR) will be slashed to 0.25%, from 1%, where it will remain for at least a year.

The RBNZ said an OCR of 0.25% was currently the “lower limit, given the operational readiness of the financial system for very low or negative interest rates”.

It said it would undertake a large-scale asset purchase programme of New Zealand government bonds, should more stimulus be required.

Speaking to interest.co.nz, Bascand said banks’ readiness for negative rates varies between institutions.

But for a number of them, their IT systems "aren’t ready and can’t cope with negative rates”.

“New Zealand hasn’t really contemplated negative rates in the historical period that we can think about. It’s a bit like a Y2K thing in a sense that they’re all set up to be positive, zero, or positive numbers," Bascand said.

“It doesn’t mean that you couldn’t create some work-arounds eventually, or adjust this, but right now [this] doesn’t seem to be the key thing to do.

“We’ve got other ways of putting stimulus into the economy if we need to. Taking on additional risk of doing something that may or may not transmit, or work properly, doesn’t seem like the smartest thing to do.”

Banks well-funded and don't need RBNZ help currently

In terms of banks’ liquidity, or their abilities to meet their financial obligations as they fall due, Bascand said, “We [the RBNZ] stand ready there to help them if they need that. But at the moment it looks absolutely fine in both the short and the longer-term end of their funding markets.”

He said banks are funded out for well over a year, as they have “way above” what’s required of them long-term.

In the shorter term, Bascand said they look “absolutely fine” for now. Yet he admitted he couldn’t predict what would happen in say three months’ time and whether shorter-term funding would be harder to replace.

“It all depends really on how markets function over the next few months as to whether at some point you get a little bit of dislocation, or some terms of borrowing aren’t available to them,” Bascand said, noting that short-term funding doesn’t make-up a large part of banks’ funding.

RBNZ not planning on creating temporary deposit guarantee scheme 

Bascand said the RBNZ could “potentially” create a temporary deposit guarantee scheme like one that was created during the 2008 Global Financial Crisis.

“It’s possible. We don’t have any plans to do so at the stage because we think banks are in a sound and strong position and it’s not a financial crisis that’s affecting banks all around the world. It [Covid-19] is affecting the real economy - households and businesses,” he said.

“The big message is, the banks are well capitalised."

He said the Government is still committed to creating a deposit insurance scheme. Details around this, including which products it will cover, are still being consulted on as a part of the second phase of the Reserve Bank Act review. 

Cabinet in December said the scheme would have a $50,000 limit, meaning someone with a $100,000 in a bank that collapses will only get $50,000 back. However someone with two $50,000 deposits in two banks that collapse will get $50,000 back from each bank.

This limit will cover 90% of individual deposit accounts and 40% of funds (reflecting that the vast majority of New Zealanders have deposits worth less than $50,000).

The design of the scheme, which will be funded by bank levies, is expected to be unveiled in the middle of the year. 

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Blinded by ideology. I predicted in 2013 on these pages thatt interest rates were in a downward trend and would keep falling.

Not so much 'ideology' re possibility of -ve rates, but huge incumbent-system inertia. I've never worked inside Bank IT: because it is, alongside Defence and Secret Squirrel-type Departments, one of the most buttoned-up, conservative (for the best reasons) and thus hardest to move environments in the world. That said, the failure to see this coming and allow for it (especially post GFC) is more than a bit concerning.

Yes, I do totally agree on the inertia quality to this. Good comment.

-ve rates are completely ridiculous anyway - so perhaps it's good news that some of their systems are unable to handle that at this stage.

Immediate employment prospects, then, for code-cutters, analysts, project managers etc, plus training in the toolsets and environments used by aforesaid banks, in order to 'negative-rate-proof' 'em. Just like Y2K, could take years, scores of smoke tests and many, many millions to make it happen. And, mirabile dictu, could all be done remotely/online, so little contagion fear. Let's Do This!

The coders will have to 'de-skill' to about 1983 to work on the bank systems.

Glass half-full, could add to many a retiree's Stash - language skills take a long time to die and big-iron environments are famously slow to change....

Lapun, New Zealand needs you.

On second thought, no. Negative rates are wrongheaded. Generational entitlement mentality.

Nothing wrong with older computer systems. Alot of industrial systems still running on windows 3.1 or earlier. Its only all this gaming and social media stuff that requires more.

Made me smile. You're in good spirits/form today, waymad :-).

Yes...because this situation was unprecedented despite it having occured in several other countries?

Just because others have done it doesn't make it sane...a bit like saying that it's ok to do P because your neighbour does it.

Because the IT heads in Sydney and Melbourne have underfunded / withheld the budget, having other priorities.

Yay! for the NZ Banks' IT holding back this nonsense.

I wish the RBNZ's IT had been as equally restricted, wishing for a bug that couldn't handle anything below 1.00 for instance.

But scary thing is they considered it, and realised they can't do it for at least 12 months.

1) The RBNZ said some things the other day and changed drastically a few days later. Can we believe what they say now?
2) During the GFC all we ever heard was that "The banks are in good shape." and it was BS. They had to take funding from the Fed. Yes, the Aussie banks took money from the Fed last time around - and it was kept secret from the Aussie and NZ public:https://www.smh.com.au/business/nab-westpac-tapped-into-us-feds-emergenc...

The more they repeat how well placed they are to get through this the more there will be to worry about.

Spot on

So instead of QE buying existing bonds, could the government issue new bonds that are bought immediately by the RB and then spend the money directly into the economy, e.g., via $1000 to everyone - like Oz did in the GFC? Is this money printing that is immediately implementable? Any reason not to other than the precedent and that it might get more inflation than they bargained for?

They could - and they just might (we'll know tomorrow) - but given this recession is going to be deep, I'd far rather they implemented a more drip feed, ongoing UBI. Something easy like every adult qualifies for the amount currently paid in super to over 65s. Swap that out for WFF and other benefits (i.e., unemployment) and for those working/earning above a certain threshold, provide the UBI by way of tax relief.

12
up

what are they trying to achieve, make savers pay the mortgage for someone else? Or lets buy a house and get paid to do it. The bizarro world we live in.
Somehow I don't think this will turn out the way Central bankers and economists expect it to.

Oh if it doesn't they can just cut rates. And if that doesn't work, they should just cut rates. And if that doesn't work they could maybe try cutting rates a bit more... insanity.

I could forsee that causing a few broken windows and more at banks if things go that far. People would be right to be outraged.

Yes, if I were the government, I'd mandate a minimum TD rate - now.

Finally some common sense in the comment stream!

To me it seems that the modern day economists, politicians and bankers have forgotten what a banks core function is, what their origins were. Nor do they have a clear understanding of the consequences of negative interest rates. It seems to me they are operating on hope, nothing else. This is the consequence of the politicians handing over control of the economy to them.

There should be some discussion of the effects of -ve interest rates in reality;
- the banks will charge depositors for putting money in them (and once this starts, irrespective of the OCR, I don't believe the banks will stop doing it readily), on top of all the other bank fees and charges they already levy. This could lead to a run on the banks as people pull their money out - it is already happening in Switzerland!
- Theoretically it may mean that we could get paid to borrow money, putting it into circulation to stimulate the economy (Yeah, right!) Won't happen, we'll still get hit with +ve interest rates while the banks preserve their profit margins
- Where will the money go that's being loaned out? With no legislated direction from the Government, people will only borrow for things that will be pretty secure - property most likely. But this scenario is classic for sub-prime lending where the banks will lend to people whose jobs may actually be under threat from the consequences of COVID19. Or if the banks are careful about their lending, then only the comparatively wealthy will be able to get loans, secured against pretty solid assets, so the lower and middle class will continue to suffer.

Just contemplating consequences.....

It said it would undertake a large-scale asset purchase programme of New Zealand government bonds, should more stimulus be required.
Hmmmm....

A recent Bloomberg article described central bank easing with the phrase “pumping money into the economy.” That’s a misconception. Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations.

Historically, base money has earned zero interest. Forcing people to hold more zero-interest money makes them more eager to chase interest-bearing alternatives. That response made for a very pretty relationship between the ratio of base money / nominal GDP and the level of Treasury bill rates at any point in time. In recent years, the Fed created such a huge pile of zero-interest money that the only way it could raise interest rates, without slashing the size of that pile, was to explicitly pay interest on excess reserves (IOER).

Without IOER, short-term interest rates would only be about 12 basis points here because the Fed’s balance sheet (of Treasury bonds purchased from the public), and the corresponding pile of base money (held by the public instead) is still ridiculously large. If the Fed lowers interest rates today, it won’t be by “pumping money into the economy.” It will simply be by lowering the interest rate it pays on excess reserves. It may even create more reserves by buying more Treasury securities (QE), but again, even that is an asset swap.

Now, if you’re saving for retirement or some other purpose, the fact that you hold bank reserves rather than bonds doesn’t make you suddenly abandon your retirement plans. Nor does all of this unconventional money have much effect on spending in the economy. As I’ve shown before, the trajectory of real GDP growth during every U.S. economic recovery, regardless of the stance of monetary policy, is well described by simple mean-reversion where the “output gap” at the recession low gradually contracts at a rate of about 8% per quarter. It’s not monetary policy that gives you a recovery. It’s time and mean-reversion.

Even boosting the price of financial assets as a result of yield-seeking speculation doesn’t give you much of a wealth effect at all. In fact, except for the early part of an economic recovery or recession, where changes in the S&P 500 are generally just leading indicators of actual economic data (rather than driving economic changes), fluctuations in the S&P 500 have no correlation with subsequent economic activity at all. Economists have known from the time of Modigliani and Friedman that changes in the prices of volatile assets don’t materially affect people’s spending.

Tinkering with security valuations doesn’t create aggregate “wealth” – it simply takes future returns and embeds them into current prices. Long-term “wealth” is largely unchanged, because the actual wealth is in the future cash flows that will be delivered to investors over time, and once a security is issued, somebody has to hold it at every point in time until that security is retired. The only thing elevated investment valuations do is provide an opportunity for current holders to receive a transfer of wealth by selling out to some poor schlub who pays an excessive price for the privilege of holding the bag of low future returns over time. Link

All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations.

MMT explained in one tweet
They also wrongly assume that government deficits create money, when actually they create national debt & growing regressive interest transfers from the many poor to the few rentiers who they seem to be serving. Link

I can confirm a lot of scrambling around whether loan documentation includes interest floors or not.

could be money in advising depositors. Run Forest run stuff.

How interesting.

Heard all this reassurance crap in 2005-8 too.
Still no depositor insurance
Of course banks really care about their customers
Please recall that Fed Reserve extended credit lines to banks down under as attested to in a book by governor if RBNZ at that time.. so they were not sound. No bank with fiat debt system and only 3% cash to meet a bank run is sound. Garbage

I agree, compared to $250k in Australia NZ really is an outlier and not in a good way. This feature alone should give Australians a lot of comfort in a crisis and it doesn't seem to get much attention.

To my knowledge and confirmed by an ex-RBNZ official at the time, USD swap lines extended by the Fed were never drawn by the RBNZ.

Hmm, if i've got 20k cash in one account and a mortgage of 100k in another.. where do i sit in terms of negative rates and obr. Best with 20k cash under pillow it seems.

Well negative rates are quite intelligently unforeseen. On what planet does it make sense to pay people to borrow? This one apparently. Idiots.

I think this comment:

Cabinet in December said the scheme would have a $50,000 limit, meaning someone with a $100,000 in a bank that collapses will only get $50,000 back. However someone with two $50,000 deposits in two banks that collapse will get $50,000 back from each bank.

is a bit misleading. In this scenario, my understanding is the way the OBR works might NOT see all of ones deposits (over and above any deposit guarantee, if we had one) taken in a bank collapse.

Same goes for us without such a guarantee.

https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-reso...

Note the word 'some'. How much all depends on the particular banks situation at the time.

Let's hope the RBNZ's stress tests have been good/adequate. Not forgetting they recently required ANZ to add more capital.

https://www.interest.co.nz/banking/99734/rbnz-revokes-anz-nzs-accreditat...

Pretty concerning.

I presume that many mortgages that are structured around a savings component would also then see that savings component affected.

Surely time for a new online bank to emerge, with a system that is written in something being taught today.

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