sign up log in
Want to go ad-free? Find out how, here.

Brash warns the Govt risks being held liable for a bank or insurance company collapse, as the RBNZ's taking on too much responsibility as the regulator

Brash warns the Govt risks being held liable for a bank or insurance company collapse, as the RBNZ's taking on too much responsibility as the regulator

By Jenée Tibshraeny

Former Reserve Bank (RBNZ) Governor Don Brash is warning the RBNZ is “taking on too much responsibility” regulating banks and insurers, describing the current system as "nuts".

Speaking at Auckland University Business School on Thursday night, the former RBNZ Governor (1988-2002), National Party and Act Party leader, and current Industrial and Commercial Bank of China (ICBC) NZ chairman, argued the RBNZ’s heavy-handedness over banks and insurers puts it at risk of being liable in the event of a collapse or something going wrong.

“The RBNZ today has been dragged back into the international framework, which I think is seriously flawed,” he said.

“The RBNZ reserves the right to approve every bank director, to access the overall balance of experience in bank boards, to approve every bank CEO, and to approve every first report to a CEO.”

Brash pointed out the RBNZ also gets a lot of information from banks, which isn’t available to the market.

“At that point the RBNZ is taking responsibility for running the bank. Not just the systematically important banks, but every bank,” he said.

He pointed out the RBNZ has to approve all of ICBC NZ’s actions and appointments, despite it being a very small operation in New Zealand.

The China state-controlled bank, which received banking registration from the RBNZ in November 2013, has breached its conditions of registration twice. 

ICBC's breaches stemmed from not obtaining non-objection from the RBNZ on the appointment of a country compliance manager, and breaching its connected party credit exposure limit of 40% by 11% for six days. Brash reportedly described the first of the two as a “misunderstanding”.


Broadly speaking, he described the RBNZ prudential regulatory regime as "nuts".

“I just think that [the system] is nuts and involves a substantial fiscal risk to the Crown,” Brash said.

“If a bank were to get into trouble, depositors and others could reasonably say, ‘look you guys had the information that this bank was getting into trouble, we didn’t.’”

He warned the first place depositors would go, would be the Governor, as the RBNZ is the part of the public sector that’s approved all the financial institution’s directors and senior management.

“The more the central banks gets involved in mandating the way the banks behave, the more implicit responsibility they take.”

Brash has made a submission to the RBNZ on the issue, he dubs a “moral hazard in capital letters.”

Banks should report to markets not RBNZ

Brash said the different approach he took towards banking supervision during his time as Governor is still the way to go.

He said he developed a system whereby bank directors had to take responsibility for their actions by issuing quarterly disclosure statements to the market.

They had to sign off statements to say their information was accurate and their banks had risk control systems in place appropriate to the nature of their businesses. The RBNZ had no more information than the market.

“We didn’t have any restrictions on liquidity, on foreign exchange positions, on risk concentration, but the banks had to disclose all that in their quarterly disclosure statements,” said Brash.

“This regime was detested by the banks themselves. The CEO of one the big Australian banks with a huge operation in NZ told me, ‘Don, you can’t do this.’

“I said, ‘why not?’

“He said, ‘because most bank directors know absolutely nothing about banking. We’re asking the bank directors to make these judgements and frankly the bank directors don’t have enough understanding of the issue to do that.’

“I said, ‘I rest my case. You want the chairman of Rio Tinto or whatever on your board because it looks good, and you want me to make all the key judgements about what prudent banking is in New Zealand. I think that’s nuts.’”

Brash said he couldn’t prove whether this approach worked, but believed it was the right approach.

Insurers accountable to ratings agencies and market forces  

As for insurers, Brash said, “I for the life of me cannot see the logic of the RBNZ supervising insurance companies at all.”

The RBNZ only started regulating insurers in 2010 through the Insurance (Prudential Supervision) Act 2010. Like banks, the RBNZ requires insurers to maintain certain levels of liquidity and meet high level reporting standards to maintain their licence.

Brash suggested insurers should be left accountable to market forces and ratings agencies like Standard & Poor’s and AM Best.

“By definition, the strength of many insurance companies is not their balance sheets, but the quality of their reinsurance streams. The chances of a Wellington bureaucrat getting their head around the quality of those reinsurance streams is not that high,” Brash said.

He maintained rating agencies were better equipped to make calls on insurers’ solvency.

He said, “Mandate a rating requirement, and mandate that before you renew your policy every year you must be told the rating of your insurer. If you choose to get a slightly cheaper premium by using a lower rated insurer, then if something goes wrong, then you’ve got no one to blame but yourself.

“An insurance company would want to have a high rating to charge a high premium.

“Whereas what we have now, we still have a rating requirement, but the RBNZ has taken on responsibility for some 90 odd insurance companies.”

Inflation-targeting good but not sufficient

Brash didn’t comment directly on the RBNZ’s restrictions on banks' high loan-to-value ratio (LVR) residential mortgagae lending that were introduced in October 2013.

“The one thing that troubles me, and I think most of the central bankers, is that you can stabilise the CPI (consumer price index) – and most central bankers have done that pretty effectively – but you may nevertheless have very rapid escalation in asset prices,” he said.

“We’ve seen that in a number of countries, where CPI inflation’s very low, but equity prices, land prices and so on, have risen very strongly.

“For that reason, a number of central banks have moved to various forms of macro-prudential controls and rules and policies to try to deal with this issue.”

Brash quoted a former Bank of England governor who once told him inflation-targeting monetary policy was good, but not sufficient.

“It’s important therefore to look for other instruments to avoid asset price bubbles,” Brash said.

“There’s a tension there, which we haven’t yet resolved anywhere. Overall, I think the (inflation targeting) framework has worked well.”

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


The problem I have with this is what is good finance/banking and what is far right political opinion. As an example, I dont myself see insurers being left to market forces when the businesses and ppl they insure are not competent to determine if an insurer is sound or not. However I tend to side on his view that the RB should not have special inside information, it should be fully disclosed and that bank directors should be capable, competent and responsible for their decisions. Or can someone explain why this is needed? “The RBNZ reserves the right to approve every bank director, to access the overall balance of experience in bank boards, to approve every bank CEO, and to approve every first report to a CEO.”


It looks like Don Brash learnt nothing from the last financial crisis. If things are seriously that bad in a collapse the Government will need to intervene they have no choice.

What he has said about insurance companies is complete non-sense. It has been made clear that the majority of insurance companies are not able to manage risk correctly, even though that is their core business. Regulation of insurance companies is necessary to protect our economy. The same way Basel III is there to make sure banks have enough capital to survive a crisis.

For a former Reserve Bank Governor he knows very little about market forces and is ignorant that they often end up broken or deliberately manipulated. Perhaps his mental capacity has been affected by spending time in Parliament.


They have to have that choice (of not stepping in). Otherwise what you are saying is the tax payer and indeed future tax payers ie our children will meet others losses, that is a huge moral hazard and unfair.

DB is a hard core ACT / neo-liberal, so no I dont think his mental capacity has been affected its only now we are starting to get insights into the real Don Brash IMHO. In fact he shows a remarkable similarity to Greenspan in his views and his un-shakable belief in the free market even when the evidence / data accumulating shows he is wrong.


Moral hazard and unfair, possibly. In fact up until recently I would have agreed with you completely.

In an extreme financial disaster there is a risk that a large enough collapse could happen that could make our entire financial system illiquid. That is the situation that was faced by the banks and Federal Reserve during the subprime collapse. I only recently discovered how close they came to a disaster that could have dragged down all of the banks. That doesn't excuse some of the poor choices that were made during that crisis and I don't believe in "too big to fail".

If the Government needs to bail out banks or an insurance company there's no reason to just give them money. That bank/insurance company should be seized by the Government, then bailed out and the directors arrested. If an insurance company is following the rules they should have a low probability of collapse, same as banks regulated under Basel III. If there is a problem then there is a high probability that criminal conduct is involved.


I see it as unfair no matter the need for the Govn to act, ie our Govn may well have to do it but that doesnt make it right. Hence the OBR, in theory when a bank closes its doors, investors and depositors money is put on hold while the chequing part of the banks re-opens.

Second para, totally agree.

Third para, see my first. If the Govn has to step in OK as long as those taking a profit from the bank take a haircut first. So shareholders 100% first up for loss, second depositors then the tax payer.

"criminal conduct" see your comment "extreme financial disaster" so I fully expect this to occur overseas and flow here into NZ. The killer will be the leverage and the P/E ratios which are crazy. Auckland is 9.6 to 1? the normal should be 3.5 to 1. Saying that NZ banks are not highly leveraged I understand, unlike the US.


Brash is talking about the regulations crossing the line into micromanaging which then puts the RBNZ in the position of being sued!......Think Councils and leaky buildings for a similarity......

When you regulate something to the point you are in effect running it then expect that the regulator will be sued.....and the regulator has a backstop being the Government oops the taxpayer!!

The issue here is that the RBNZ think they have managed risk by requiring all the regulatory hoops to be jumped through.......but they have actually transferred the end risk to the I don't think it is Brash who has learned nothing from the GFC......


In relation to leaky buildings the Councils were at considerable fault as they allowed a wild west environment to occur. That coupled with BRANZ approving systems that triggered problems. Then you couple that with a lot of designers who were not equipped for the new environment under the Building Act. Also all of the companies involved in leaky building folded and the Government put in "last man standing" that drags in everyone on the project even if their work had nothing to do with the leak. Councils are the last man standing because of the legislation the Government put in place. Not a fair comparison.

In relation to being sued there are ways to operate to minimise that risk. Is the RBNZ able to operate in a risk minimised manner? Does the RBNZ have sufficient legal protection?


Dr Brash is quite right here and the scenario he lays out is really reflected in a way by what happened to SCF: the government had a full time officer in SCF HQ from June/July 2009, let the Dead Man Walking back into the "Retail" Deposit Guarantee, went on to nationalize the ruined heap and pay out all manner of institutions (many of them foreign) to avoid being sued.


Thank you Ergophobia for injecting a does of reality into the discourse. Brash has reason to be concerned. Financial matters in the reserve currency nation remain fragile at best - transmission to home territory is inevitable, but accompanied with widening spreads against the USD bench mark rates.


My Regards to you SH and may I record my appreciation of your, more qualified, contributions here.


What's the RBNZ's position in the SFF debacle.

The annual report revealed that its average interest rate on secured loans, which represented 95.4 per cent of total loans, was 6.01 per cent and 11.02 per cent on its overdraft facility.

Silver Fern Farms' peak season overdraft must be huge as its 2013/14 interest-rate costs were $37.4 million compared with a theoretical $18.7 million based on its average interest rates and year-start and year-end debt figures.

The interest costs of $37.4 million suggest that Silver Fern Farms' peak season bank overdraft funding could be as high as $500 million.

Will the unsecured bank creditors (term depositors) not contest an OBR capital haircut whilst in receipt of returns closer to 3.5%, than not out to five years? Read more

Kiwis might not have to wait much longer as the foreign vultures are busy terminating Australia's prospects.

One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. Read more


One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, chuckle.

What does that make New Zealand? Is Auckland really a cow town that thinks it's Hong Kong?


"Brash suggested insurers should be left accountable to market forces and ratings agencies like Standard & Poor’s and AM Best."

What a joke, they're incompetent at least, if not corrupt.

From Rolling Stone:

"What about the ratings agencies?

That's what "they" always say about the financial crisis and the teeming rat's nest of corruption it left behind. Everybody else got plenty of blame: the greed-fattened banks, the sleeping regulators, the unscrupulous mortgage hucksters like spray-tanned Countrywide ex-CEO Angelo Mozilo.

But what about the ratings agencies? Isn't it true that almost none of the fraud that's swallowed Wall Street in the past decade could have taken place without companies like Moody's and Standard & Poor's rubber-stamping it? Aren't they guilty, too?

Man, are they ever. And a lot more than even the least generous of us suspected."......…


Ratings for sale

Rubber-stamping? - harhar-hardy-harhar - ratings were bought - for a fee

someone, somewhere, sometime, was going to hold them to account for that - where's it at now?

Seven years later

documents, unearthed through public records requests, show that bankers from six Wall Street firms—UBS, Bear Stearns, Citigroup, Merrill Lynch, JPMorgan, and Goldman Sachs—claimed they could persuade the rating agencies to make favourable changes to their criteria…


Yes they are IMHO.


Complex and confusing. Who is right? Scenario - I have money deposited in banks. Those banks are heavily invested in the Auckland property market through mortgages. They haven't asked me if I am happy for them to invest my money there, and as far as I can determine I am not getting any risk premium from them in my interest. If the property market collapses as some expect, will my money be protected before the bank's profits?

For the average consumer, what choice do they have. All banks are invested in the property market, events that may lead to a bank collapse could also lead to other markets sinking. So how can the average conservative individual protect themselves from the economics of greed?


Yes, but surely by now you know the answer to how well your money is protected?

What choice do they have? well isnt that the Q. Everywhere you look the risk is IMHO way beyond reasonable, but when you have commercial bankers playing with other ppls money and they get bonuses what do/did you expect? The classic defence is cash and cash like things, if I had some reasonable money I would take professional advice about putting money in short term Govn bonds, ie 6~12months terms.


It is not over regulation but inefficient and ineffective regulation that is going to kill the goose.....and Central Banks have not learned anything from the last GFC. Add to it more political control and influence on Central Banks in the recent years, the goose is well cooked. See how afraid Janet is to stick with her decision to start increasing the rates, especially in an election year.


I think you have got it precisely backwards Smokey. Far from it, governments around the world have been conspicuous in paying obeisance to the banks since the GFC. They bailed them out to the tune of trillions and continue to do so. They have also failed to institute any meaningful structural reforms which even attempt to foster improved stability and structural integrity of the financial system. Arguably its become more unstable and fragile..

"Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way."…


Current Industrial and Commercial Bank of China (ICBC) NZ chairman

Of course he is going to say that the RBNZ is over regulating seeing as he is a chairman of a bank. He is effectively commenting on behalf of ICBC bank.