By Gareth Vaughan
Reserve Bank Governor Adrian Orr has hit out at the New Zealand Bankers' Association (NZBA) over a comment made in the bank lobby group's submission on the Reserve Bank's bank capital proposals.
The comments came from Orr in a press conference following the release of the Reserve Bank's Financial Stability Report on Wednesday morning. Orr was answering a question about NZBA's claim that the Reserve Bank's proposals to increase banks' regulatory capital requirements could cost households, businesses and the economy about $1.8 billion a year.
After indicating he didn't agree with this, Orr said: "What was one of the interesting ones from NZBA? That at the end of the day if banks fail it should be our fault and we should pay them out anyway."
This, he said, was in NZBA's submission which he found "astounding."
He was referring to a comment in a report by Sapere Research Group that was commissioned and submitted by NZBA. It outlines a bank crisis scenario where it's suggested the Government, meaning taxpayers, should take the hit rather than bank depositors. Note, bold added by me for emphasis.
"We have some concerns that the OBR [Open Bank Resolution policy] is being assumed to provide a ‘bail in’, whereas it seems to us highly unlikely that any government would allow all depositors in a major bank to take a haircut. Depositors would have a right to argue that the Reserve Bank should have seen this coming and that as the government’s designated regulator of the banks, the government should take the hit rather than the depositors. Depositors are poorly placed to monitor the performance of their banks in contrast to the regulators who have better information and a duty of care to the depositors. Requiring banks to hold additional Tier 1 capital would seem unlikely to be the most efficient method for managing these risks," the Sapere report argues.
The main author of the report is former Treasury Secretary Graham Scott.
In response to Orr's comments an NZBA spokesman said the lobby group's submission did not suggest the government should pay out in the event of a bank failure.
“Dr Graham Scott, who is an independent economist, speculated in his report, in the event of a bank failure, the Minister of Finance may decide against invoking Open Bank Resolution. In this hypothetical scenario the government may choose to meet the costs of the bank failure instead of depositors taking a haircut. Dr Scott did not suggest that this should be policy and this part of his report was not referenced in NZBA’s submission," the NZBA spokesman said.
“We have clarified this with the Reserve Bank.”
The Reserve Bank proposals announced in December would see NZ banks - led by ANZ NZ, ASB, BNZ and Westpac NZ - required to bolster their capital by about $20 billion over a minimum of five years. For background and detail on the proposals and bank capital in general, and the nuts and bolts of what's proposed, see our three part series here, here and here. Additionally the Reserve Bank proposes to designate the big four as systemically important banks meaning they'd have capital requirements above and beyond other banks.
The deadline for submissions on the capital proposals was May 17, and the Reserve Bank says an announcement is planned by the end of November, with implementation of any new rules starting from April next year.
"There are a lot of interesting assumptions across a lot of the submissions, particularly from those who are the ones who may be facing higher capital requirements," said Orr.
Nonetheless Orr said the regulator is "open minded" and has been "right from the outset."
"If we see sufficient reason to be changing any of the parameters we will and we will make it clear why we did," Orr said.
"We are wide open to do the right thing by the country. But we want more capital, we want good quality capital in this country because it's the well capitalised banks that are in the long-term the most sustainable and profitable."
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