RBNZ Governor Adrian Orr says delivering good customer outcomes and removing sales incentives shouldn't be rocket science for banks

By Gareth Vaughan

Working out what are good customer outcomes should not be rocket science for banks, says Reserve Bank Governor Adrian Orr.

Orr was speaking to interest.co.nz in a Double Shot interview about the Reserve Bank and Financial Markets Authority's review of banks' conduct and culture. 

After the regulators' conduct and culture report was released in November they said individual banks will receive specific detailed responses, will need to develop a plan to address the feedback, and report their progress to the regulators by the end of March. Banks have also been asked to remove pay incentives linked to sales.

"It's not rocket science. It's just about making an effort to think about what are good customer outcomes. Some banks used to talk about whole of life experience. 'How can I get you in a savings account as a kid, help you through university because I know at some point you're going to be worth a lot to me'," Orr says.

In terms of the March deadline he says the two regulators will be working "very, very closely" with the bank boards and senior management to see how seriously and committed they are to the findings. 

"Because a lot of the findings was about preparedness to invest in the frameworks, rearrange the importance of agendas, understanding incentive structures and whether they are driving the kind of long-term financial outcomes that society and customers expect. So that will be a lot of intensive work with them," says Orr.

He expects banks' responses in March to be "quite telling, straight up, very quickly."

"I have to say that the vibe so far has been good. Everyone seems to be very busy and working on this and we're being told that they hear us, they [will] do it. We will be making sure that they are committed to those plans and that we can see those plans' progress," says Orr.

Naming and shaming

Asked about the "naming and shaming" of National Australia Bank's chairman and CEO Ken Henry and Andrew Thorburn in the final Australian Royal Commission report, and whether such outing of senior bankers could happen in New Zealand, Orr said he hopes things unfold in a different way here.

"I would hope that things unfold in a way that if that comes to that situation we probably wouldn't even need to name them, the institution or the individuals. The process we're following rather than everyone's guilty until proven innocent which was the McCarthy process, that we are saying 'here is your chance to explain and if you are explaining well and it's very convincing then why wouldn't you be shouting from the rooftops about what we are doing,' what they themselves are doing. So there's an enormous incentive to self disclose what you are doing and how it is improving," says Orr.

"I don't know where the end point comes. The great news was we did not find systemic misbehaviour. What we found was widespread under-investment across thinking in this space and a lot of gaps which could lead to the risk."

Monetary policy, RBNZ Act review & money creation

In the video Orr also talks about the Reserve Bank's move to a Monetary Policy Committee and what impact this has on his powers as Governor, the dual monetary policy focus on employment and price stability, the Reserve Bank's objectives as phase two of the Reserve Bank of New Zealand Act review gets underway, and money creation including core money and credit creation.

(This is part two of the interview with Adrian Orr. Part one, on bank capital, is here).

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Thank you Gareth for asking Adrian about money creation!! Interesting to hear his response - “banks create credit.” Herein lies the issue. If it looks like a duck, walks like a duck and quacks like a duck... credit for all intents and purposes functions as money. It is money. If Adrian thinks banks can’t create money because they can’t print notes and mint coins then I think he’s being disingenuous. Look at our M3 money supply, how much of that is notes and coins? Approximately 2%. It looks like the RBNZ and his viewpoint have been superseded a long time ago.

Again, great question Gareth. I’m just disappointed by the response. It looks like the core issues will be further ignored.

Quite right. What banks should be doing is 'facilitating credit' ( well, it's debt actually) not creating it; recycling the money supply within the system. Credit Creation should exclusively be the domain of the RBNZ, in our case. They can determine the right quantity of 'money' in the system and by targetting that, they can influence the retail banks lending patterns.
Remove credit creation capacity from the commercial banks, Mr Orr, and many of your objectives will be better and more easily achieved.

Agreed, let's get banks back to being a middleman. Funnily enough, their behaviour and goals will naturally alter for the better with this as well. I wish there was a political party that could step up to the plate and deliver the credit creation message so NZ would understand and could make genuine change.

And link it to that which underwrites it - or expect disappointment

PDK, Would you consider money that was constant and had prices of goods and services that oscillate around it based on supply and demand. That way scarce resources would cost more and be consumed at a slower rate?


I think you are a perfect example of the people who AO is talking about that don't understand the concepts of money and credit.

Don't conflate the concepts of 'money' and 'credit'. As Withay says, for all intents and purposes, credit may be equivalent to 'money' in some regards. But they are very different and the confusion is at the root of the issue.

"Credit Creation should exclusively be the domain of the RBNZ, in our case. They can determine the right quantity of 'money' in the system and by targetting that, they can influence the retail banks lending patterns."

Credit should not be in the realm of the RBNZ because it is a secondary function to issued 'money' - as AO explained. Credit is created from the issued 'money' stock and can only be done so under the assumption that their is confidence in the stability of the monetary platform.

The RBNZ already has functions for which to control the supply of M1,2,3 'money' in the system. Ya know - monetary policy tools?
Sure, it is difficult to model the credit creation path, but this isn't some out of control chain reaction of cash growth.

And, again, we find ourselves with a different point of view.
Being a generation ahead of you in the marketplace (perhaps 5 years!) I have a different set of experiences and views that formulate my writings. I am reminded of one of my old colleague's comments some time back:

"Ethics and rules are not about the same thing. I am in no way saying that abuses did not occur in “my day” but there was an ethical overlay that in some measure precluded the necessity for detailed rules. Indeed detailed rules promote a box-ticking mentality rather than an ethical code."

Today, there is a need for detailed rules. Any ethical overlay has evaporated. Debt is created without thought of consequence. Someone has to take responsibility or we end up on the same path ( is it working? Not in my opinion) so it might as well be the RBNZ, directly, in our case.

Gareth Vaughan “This has created the perception that banks can create money out of thin air”

The critical thing that Steve Keen or Richard Werner tries to get across is that loan creation actually does have a macroeconomic impact on aggregate demand or GDP. Whereas someone like Ben Bernanke would have you believe that commercial bank issued debt is simply a redistribution between borrowers and savers and consequently has absolutely no macroeconomic impact whatsoever. So does commercial bank issued debt have a macroeconomic impact or not? That is the critical issue that leads to discussion! Obviously, banks can’t create infinite loans, there are restrictions, there’s complexity, and checks & balances in terms of how much book money can be created, capital ratios etc. I think you're being a bit unfair to Orr because the question wasn't framed in the right way.

Naive indeed. Banks are not going to change untill they are forced to. "A good customer experience" ? Nah. They have a different idea of the world.

Question Withay, BW, PDK - Before technology the RBNZ (or what ever we called it then) controlled the money supply by the number of notes and coins it released into circulation. Are you advocating we effectively return to that model but using technology? If a bank has the ability to create credit/debt what would be be flaws in such a model. i think the benefits are mostly obvious. Does such credit need to be backed up with something of substance (i.e. deposits, loans from other banks/entities)? If so why? Why would the country benefit if that credit/debt was controlled/limited by the RBNZ?

And then we get back to bank behaviour and practices increasing risk.

Yes, to most of that. "Pre-technology" the RBNZ controlled the amount of 'money' ( more than notes and coins as we all know) through a series of market interventions. Mostly weekly ( note auctions; bond issues etc). But for much of that time, we had a fixed exchange rate, and capital & goods trade controls. "We" controlled the whole system from how much money was sloshing about domestically to what price it was ( interest rates via intervention) and what goods & services we wanted to come in/go out of the country.
A tiny country ultimately can't sustain that on its own. China could/can, the USA could. By the time you get to the EU even, maybe. So it will take a new approach, not one going back to what we had. Adrian has a number of cards he can play already - mainly capital controls ( he's probing that one) and lending ratios ( LVR and DTI being the blunt end of a many pointed stick that can control spending habits and hence debt creation). So more on those fronts. Let's see how those go, and keep our eyes open.

"Before technology the RBNZ (or what ever we called it then) controlled the money supply by the number of notes and coins it released into circulation."

And, effectively it still does. All credit (and thus M1,2,3 misnomer 'money') is underpinned by the money that the RBNZ issues.
Again, a confusion of money and credit.

I'll only speak for myself as I think I might differ slightly with the others. I would advocate for no money creation either by commercial banks or the RBNZ. Money is a reflection of your time and labour and should be free from interference accordingly. The argument that money creation encourages growth is absurd. It is increases in productivity that we need and due to money creation we have been robbed of that (speculation due to artificially created inflation).
Basically, money creation is a form of tax and behaviour compulsion which has the negative effect of robbing savers and those less fortunate while giving an unearned boost to those who already own assets increasing unearned inequality. And of course the banks make out like robbers from this practise.
Money creation only serves to enrich a few at the expense of the general population hence the (misdirected) pushback we are seeing world wide.
Here is a truely excellent presentation that elaborates further on the issue including banks behaviour:

to best of my knowledge, a central bank can either fix the interest rate or the supply of money to achieve the same objective of price stability. If you fix the supply of money, the interest rate will fluctuate depending on the demand for money. If you fix the interest rate, the supply of money will fluctuate. Both have their own draw backs and strength. There is no optimal solution. If we were under a fixed supply policy, we would have equally (if not more) serious problems manifesting themselves in various forms.

Thanks for the replies, i hope i am a little wiser. Nymad if i may, I get that there is a theoretical difference between "credit" and "money", but surely in today's world most financial transactions are taking place with credit, thus as has been pointed out, incurring debt that must be paid back. This pay back occurs with either credit, or money which enables one to focus on the difference between the two. But for all intents and purposes at the functional level (I get that it is different at a higher level, see below) the two are effectively the same.

At a higher level it can be argued that credit can generate money. Credit used to carry out a purchase will incur a debt which must be paid back. to pay it back with credit will simply shift the debt, but to pay it back with money will clear the debt. Defaulting on the debt however may or may not create a problem depending on the basis of the initial credit issue.

Its a long dry spell in Auckland housing. What I want to know is what the RBNZ is going to do to get the market moving.. After all, about 14 percent of Auckland housing stock , all the stuff purchased since January 2016, is not adding to our wealth. Most likely if any of these property owners were to sell at present , it would be at a loss..What is the RBNZ going to do as volumes then prices fall nationwide.. I do not recall the retail banks slashing the OCR to historical lows and maintaining the OCR at historical lows, to encourage Kiwis to take on more debt.

It's not their job to create money to push the market up. Reserve banks taking up that mantle to date has been half the problem.

Houses will sell when supply and demand meet. There's plenty of demand, but maybe not at the prices some are trying to sell for.

I think Adrian Orr should be nominated New Zealander of the year for sticking his neck out to stabilise the NZ banking system, reduce the probability of taxpayer funded bank bailouts, and to reduce the cost of NZ sovereign debt.

Blimey! What a subject & thanks for all the above explanations. I'm not sure I'm any the wiser, however, isn't credit your money before you own it(?) & as long as what you've bought increases in value, everyone will do well out of it. It's when you borrow (create credit) & the prices decline that we have a problem.
Surely the banks must know this & play the game accordingly. And looking at history you get 8 or 9 good years for every 2 or 3 bad ones, or thereabouts, so it's 3 or 4 to 1 you'll make a profit - as long as the rules of the game stay the same I suppose.
The game could go on forever with millions turning into billions then turning into trillions etc. All driven (as in a driver of a car) by controlled inflation. Struth, this is next level economics for me. I was brought up thinking you had to work hard to make your money.