RBNZ Governor says differences between deposit insurance & minimum deposit not frozen in OBR scenario are 'technicalities', NZ banks searching for 'skeletons' against backdrop of Aussie Royal Commission

By Gareth Vaughan

New Reserve Bank Governor Adrian Orr wants more staff to beef up the prudential regulation side of the central bank's responsibilities, and is keen to have a debt-to-income ratio tool added to the regulator's macro-prudential toolkit.

Meanwhile, Orr says the differences between explicit deposit insurance and the de minimis, or minimum, sum of a customer's money exempt from freezing or haircutting if the Open Bank Resolution (OBR) policy was used on a failing bank, are merely "technicalities."

Speaking to interest.co.nz in a Double Shot interview Orr, said the upcoming second phase of the Government's Reserve Bank of New Zealand Act review is welcome. The first phase of the review centred on monetary policy, with the second set to cover the Reserve Bank's prudential regulation responsibilities.

"It's incredibly welcome, it [the Act] is 30 years old the world has moved on and so has the way in which we regulate the banks," Orr says.

"For inflation targeting we've got a clear target [being] 1% to 3% on average. For the prudential regulation, - how do we articulate that target? In other words what is the risk appetite of the people of New Zealand as represented by Members of Parliament for banking regulation? Do you screw it down to one corner where nothing can happen - it's very sounds but totally inefficient, or do you have trade-offs allowing firms to come and go and consumers to be aware etc? So that is going to be a really good, useful articulation that will come out of that," says Orr.

Against the backdrop of the unacceptable conduct coming to light in Australia's Royal Commission on financial services, Orr doesn't believe New Zealand needs its own Royal Commission. However, he says the impact of the Australian one is certainly being felt in NZ.

"There will be not a single bank in New Zealand that is not, at the moment, really checking every cupboard for skeletons here in New Zealand. That is without doubt. This has really put the wind up the banks to say 'hey, what is the alternative to sound regulation, it's a Royal Commission'. We're meeting collectively with the CEOs, we're meeting individually with the chairs, and we always do on a regular basis," Orr says.

"Is a Royal Commission necessary? At the moment in my personal opinion no, but I'm not the one who would call one anyway."

Orr says while the Australian Prudential Regulation Authority is "being held up as some [sort of] global best practice," and works alongside the Australian Securities and Investments Commission and the Reserve Bank of Australia with all having "heavy boots on the ground," they're still having "this cultural challenge." Thus more hands-on regulation than the Reserve Bank's light touch regulatory oversight of banks isn't necessarily the best way forward.

"... if you get it wrong it can be part of the problem because people don't own the risk," Orr, who took on the Governor's role late last month, says.

Australia has more prescriptive, rules-based bank regulation than NZ, where principles-based regulation dominates.

'Foreign taxpayers cannot be relied on to bail out domestic depositors'

Asked whether the Reserve Bank should get an explicit statutory objective to protect bank depositors and/or insurance policyholders, Orr says deposit protection, or deposit insurance, is "something that's going to be here in the future." NZ's currently an outlier among OCED countries in not having explicit deposit insurance.

"I think that's something that's going to be here in the future. We need to work our way through what it means. I think people have been talking across each other a lot," Orr says.

"The bank here has got a policy called Open Bank Resolution. And that is the idea that if a bank is too large to fail, we have to keep it open. But we have to recapitalise. So the current owners or investors who have largely done their dough, how do you recapitalise it and how do you have the door open the next day?"

"As part of that open bank resolution, we've already said there can be a de minimis around depositors money that they will have access to. We just need to speak in better English to say 'you know you are going to have some cash there, you are going to be able to get your sandwiches, meet your bills, do all of that on the Monday. Because if it didn't happen that way, then that one bank failure creates all banks to fail, there's [bank] runs everywhere'," adds Orr.

 "So being explicit with the language is really important. New Zealand needs an open bank resolution capability because foreign taxpayers cannot be relied on in any sense or form, to bail out domestic depositors. It just doesn't happen that way in the world, and it certainly doesn't happen over the instant time period needed. So we need to be able to say 'this is how we will shut and reopen a bank quickly and don't worry there will be some de minimis access to your deposits'."

When it was put to him that depositors having access to a de minimis sum if open bank resolution was implemented on their bank isn't the same as explicit deposit insurance, Orr suggested the difference is merely technical.

"We could have a discussion through that legislation to say 'economically it's the same, could we call it the same, or is it part of a failure management?' I believe it's the same end outcome, the technicalities behind it are just technicalities. We need to be able to say to the public 'if we're shutting the bank down, what do you have access to, what is the guaranteed de minimis or minimum, or protection,' and then we need to work out how is that going to be funded."

In its Financial Sector Assessment Program on NZ last year the International Monetary Fund (IMF) noted the Reserve Bank has suggested a de minimis exemption of $500, but noted $10,000 per depositor would exempt the full amount of 80% of bank deposits, while still leaving the bulk of deposits by value at risk. Under Australia's deposit insurance scheme, deposits are protected up to a limit of A$250,000 for each account-holder at any bank, building society or credit union that's authorised by the Australian Prudential Regulation Authority.

'The begging letter will go out to our owners'

Meanwhile, Orr - like his immediate predecessor Grant Spencer, wants a debt-to-income ratio tool added to the Reserve Bank's macro-prudential toolkit. And in terms of the Reserve Bank's prudential regulation responsibilities, Orr wants more capacity, - more boots on the ground.

"We do need more capacity, we've made that really clear. .. The begging letter will go out to our owners, our stakeholders to say 'more capacity'."

Asked how many more people the Reserve Bank wants, he says "it's in the tens not in the hundreds."

"It sort of depends if we stick to the broad type of three leg way we're working [in regulation], and by that I mean still putting a lot of emphasis on market and self discipline, but more follow up and more regularity around oversight," says Orr.

The Reserve Bank currently has 52 staff in its prudential supervision department. Last year's annual report showed a total of 252 full-time staff. Annual operating expenses were $56.8 million, which was $12.7 million below the central bank's funding agreement with the Government. The Reserve Bank's annual surplus was $155 million and it paid a $145 million dividend.

The importance of self-discipline

The Reserve Bank approach to supervision relies on three pillars being self, market, and regulatory discipline. The self-discipline pillar relies on directors’ attestations to the fact that the bank has adequate risk management systems in place. Orr says the recently reviewed director attestation regime remains fit for purpose but the Reserve Bank can do better with it.

The IMF report last year judged the Reserve Bank to be "materially non-compliant" in 13 of 29 international bank regulatory and supervision framework standards, or Basel core principles.

"The lack of first hand independent verification of prudential returns and assessments of banks' risk management practices prevents the RBNZ from having a thorough understanding of the banks," the IMF said.

In response the Reserve Bank said despite a rebalancing towards more regulation post the Global Financial Crisis, NZ’s banking regime remains unusual given the emphasis placed on self and market discipline, and its relatively low-intensity supervisory approach.

"In this regard, the results of the formal grading assessment against the BCPs [Basel core principles] came as no surprise - and indeed aligned very closely with the Reserve Bank’s own self-assessment conducted prior to the August mission," the Reserve Bank said last year.


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44 Comments

Is he a perfect Old Boy ? Time will tell...

He has already made many contradictory statements. In most cases, central bank leaders are little more than puppets. The ideology is drives decisions.

Is he ginger though? That's the important question for me.

Bureaucrat wants more staff... How many work there I wonder? Google not helpful in this.

If you read the story you'll see.

Haha, sprung, I see it now, thanks.

They need to make these beuracratic sort prove themselves by outperforming market benchmarks as the head of a different government agency for a few years before they allow them more staff...

I’d say he can have 10 extra staff per billion NZD he outperformed the market average by at the last government agency he headed up. Too harsh?

There are already 250 staff at the Reserve Bank.

Any organisation with 250 could achieve a lot. Why is RBNZ's productivity so low?

NZ depositors depend totally on Bank directors dligently and exhaustively ensuring that what they are signing off on is actually true and the bank managers are not pulling the wool over the director's eyes. I hope the Directors have the "fear of god" instilled into them by the regulators, because the system totally depends on their skill and integrity in this critical investigative task.

Don't hold your breath on that..

Just remember. The loan creates the deposit. Most NZers don't really have any need for cash savings anyway.

So we depend on Bank Directors and their diligence. That's a worry. If they were ever going to do anything that interrupted the short term thinking of bank management and cash flow of shareholders they would never have got the directors job.

When is a bank a bank.

Larger borrowers get credit done in Sydney and Melbourne.
Deals get placed on bank, branch or other country balance sheet depending on risk headroom, tax, or other mgt wish.

NZ bank bits are not separate from Oz bank bits!.

n 2014 the then head of ASIC, Greg Medcraft, said Australia was a paradise for white-collar crime. He was right. What he didn’t say was ASIC was partly responsible for the cesspit of misconduct

https://www.smh.com.au/business/australia-paradise-for-whitecollar-crimi...

Finance industry players were not "Christian soldiers", Mr Medcraft said on Tuesday, but were motivated by fear and greed.

https://www.smh.com.au/business/consumer-affairs/moral-compass-lost-in-s...

err, everyone involved with money is motivated by "fear and greed". Bankers, shareholders, regulators, and especially customers (both depositors and borrowers). Borrowers want bankers to offer them money often at unusually low rates, depositors want high returns, and no risk. Both are classic "fear and greed' symptoms. For shareholders the shift is heavy to 'greed', for regulators the shift is heavy to 'fear', and for bankers it depends on what function you have in the bank and how you are remunerated (what the Aussie RC is all about). 

But to suggest it is only bankers motivated by 'fear and greed' is plain wong. It's the basis of financial decision making by everyone.

Thats wrong on so many levels.

Most of all because it purports to show awareness and reference with the human condition, but doesn't.

Appologies for having you triggered, triggered you.

Mr Orr indicated that he would go off and be a bank director if the regulatory framework was too prescriptive because it would remove the downside from the job. If the regulatory framework leaned more towards financial and criminal penalties for individual bank directors whose attestations were found to be wrong or worse still fraudulent maybe the job attraction would disappear along with some of the depositor risk.

Exactly bro.

There is a real fault in the
Don't look, Won't look
Method of regulation.

Especially as the heavy lifting bit (we piggyback the Australian compliance engine) has turned to crap/shatt itself.

Lets just say tuning our moral compass to that of the penal colony is problimatic.

How is a bank deposit guarantee scheme technically the same as the OBR de minimis sum?

I'd like a bank guarantee, why not, banking is an essential service and should be treated as such. Australia has it and they own our banks, so the rationale of not having a deposit scheme because it leads to lack of responsible practices is a just wrong. The Australian bankers make the decisions for the kiwi divisions. Glad there's some reform coming through but it falls short.

You can insure a house, car and many other assets.
Cash deposits should be absolutely the same, not subject to open bank resolution.
A bank deposit scheme is a must.

Tell the bank you will withdraw all your money unless they arrange to insure your deposits then.. and don't complain when they tell you what its going to cost you.

Or do you think it's going to be free or paid for by somebody else?

Couldn't they take the fee out of their astronomically perverse profits ? So so hard done by.

No, they'll take it out of your term deposit rates. Don't forget, the bankers work for the shareholders, not the customers.

Deposit guarantee schemes are not 'insurance' as you know it. They are taxpayer subsidies. If they were proper 'insurance', private insurers would be prepared to take the risks. But they never do. Would you do that? Of course not; in any event/claim you would be broke.

So they require the taxpayer to be the mug.

Of course depositors like them. It gives them something-for-nothing - risk-free status. It scews the scrum from the have-nots (most taxpayers) to the haves. It is patently inequitable. Large depositors that might be affected by OBR have all sorts of options, especially investing in Government bonds. But they won't take them because they are chasing yield. They want higher returns, no risk, and no work. That is an absurd expectation. (Small depositors can rely on the de minimis.)

Yes, deposit guarantees are available in other countries but that does not sanitise the distortion or make the policy right. Rather it confirms the extent to which moral hazard has infected other countries regulation and public policies. Best we don't follow others' mistakes blindly.

A bank deposit scheme is a huge public policy cockup. Depositors need to assess the risks (work) and act accordingly (more work). Don't expect a free lunch.

If the de minimis is set at $500 wouldn’t those who are paid weekly win over those who are paid monthly? Would the employer even be required to pay wages anymore if the employer only has access to $500?

The history of bank deposit schemes in the last crisis is also rather illuminating.

Ireland had a massive house price and house building and bank lending boom. This was caused by super low rates in Euroland to help Germany integrate and rebuild East Germany. The Euro having been formed as the price France demanded of West Germany. Both Thatcher and Mitterand were very wary of allowing a combined Germany, partly for historical reasons, but mainly because it fundamentally changed the power structure of Europe. So the French in their wisdom came up with the scheme whereby the Germans would give up their beloved Deutschmark as the price of unification. The theory being that this would bind them into Europe in perpetuity. The Germans, of course, were told that it was the same currency, different name.

Anyway, the low interest rates caused a massive housing boom across Ireland, Spain, Greece. When it started to fall apart, the French and German banks faced massive losses. So Ireland was asked to guarantee their bank deposits. Aussie soon followed and so did we. Of course, the Irish got well and truly done over as the French and German bank losses ended up as Irish government debt. Similarly here, South Canterbury Finance went on a lending spree once guaranteed, followed shortly thereafter by bankruptcy and their debts ending up on our governments books.

Make of it what you will.

Maybe slightly lower interest rates on deposits to offset deposit guarantee. My concern the Aussie banking system takes a hit an they start taking excessive dividends from NZ .

All with the full backing of the APRA.

I wonder if these RBNZ turkeys have ever simulated an OBR event? Have they ever maraudered into a bank and demanded the bank open the books? Have they tried to square up credit with deposits before, using a snapshot of actual bank data?
My feeling is that it's all theoretical, and when the SHTF, everyone will be burned and the system will be history.

This is a particularly silly accusation. Of course they have, and do. Not only are they in there regularly and at an operational granular level, they are "in" at the the board/director level concerning governance and strategy. The amount of detail the regulator requires is far above what they re-publish in the public-access data, and far above what they require the banks to publish in their GDS.

Further, they require require each bank to run 'stress tests' and keep standard ones updated.

In terms of "square up credit with deposits" perhaps you miss the very regular reporting of mismatch ratios? You can see that here, but of course the RBNZ has it by bank. (Download the tables for a fuller view.) This is just one metric of a very wide range of credit balance reporting. By bank, you can see a top level here.

The real action goes on within the loan books. The regulator has power to inspect, run stress scenarios, access the bank's own credit testing, etc, and I am sure they do.

Banks who breach reporting or credit event standards to them face deregistration. That is something the RBNZ has threatened in a number of cases, even of the largest banks.

Anyone who takes the time to read the public disclosure materials will know this comment is far off the mark. And the RBNZ has access to far deeper data (and a power to inspect even deeper) than what is disclosed publicly. I suggest you start there (when was the last time you read a GDS ? You may not have, but the RBNZ has far deeper access that that, and I suspect you will find a GDS full of detail.)

Simulating an OBR event was done before the policy was put in place and is a regular focus of regulation now it is in place. Criticism of OBR as a policy is a fair call, but to suggest the RBNZ is asleep to the updated risk or of the consequences is just a drive-by smear.

Thank you for the thorough explanation David Chaston, I found it very reassuring. I wish the RBNZ would explain their actions in the eloquent way you just did. An OBR sounds very arbitrary to the person on the street.

What's your advice to FHBs with hefty deposits? A friend of mine says in Korea, it's common for people to spread deposits across multiple banks.
Also, what do you regard as the likelihood of an OBR happening? I think it would be remote, given the LVR mechanism required for property investment. Have LVRs helped catalyse bank capital adequacy in any way? Thanks David!

"As part of that open bank resolution, we've already said there can be a de minimis around depositors money that they will have access to. We just need to speak in better English to say 'you know you are going to have some cash there, you are going to be able to get your sandwiches, meet your bills..."
Apart from the awful language used, I would like to argue that the other thing wrong with this comment is that the de minimis mentioned here is not what most people would call a de minimis. The proper de minimis is of course a pre-published fixed minimum amount of money that would be paid out from every bank deposit (or depositor). So in theory (if you didn't have billions) you could spread your money around between multiple banks in the knowledge that you would get all of it back again if one or two were to fail.

But how much is that exactly?

25% of each person's deposits perhaps ?

No, it'd have to be a dollar amount, and i'd suggest $5k as a minimum. Somebody with 40k in their account is most likely going to be just fine with 30k untouchable for a while, but the single parent living from week to week on their $800/week will not survive with only $200 available

America rescued its Banks a decade ago. There is no reason why NZ won't do so, if it is politically expedient. Even the Aussies. The consequences won't faze the pollies in power when it happens. Their survival instincts will kick in.

There have been many bank failures in the USA since 1933 when the FDIC was implemented. In that time bank depositors have lost no savings (up to the current $250,000 limit per bank account) nor has it cost the US taxpayer any money. While not a perfect system it does keep banks open and depositor money protected - and more importantly keeps trust in the financial system.

NZ is unique in having it's OBR scheme which puts the onus on depositors to fund any bank having difficulty and to be able to decide in advance which of the NZ banks is least likely to have financial difficulty and least likely to have OBR invoked.

Since NZ is in the unique position of its major banks being owned by Banks of another country, the real protection for the locals would be a good limit on dividend repatriation, so as to build capital here and an iron clad agreement with the overseas owners to pitch in with additional capital if required. Not sure whether anything like that exists or will come to exist, given that NZ has not much bargaining power in these matters..

I doubt that this would ever happen. The time to do this would have been when the Aussies first bought or set up the banks.
If only one Oz owned NZ bank has having a problem, and its Oz owner did not recapitalize this NZ branch, that will immediately make all other Oz owned banks here insolvent. Nobody here would put a deposit in one for ever more. There would me meltdown. The NZ govt would know this. There would be some pressure on the govt to........

Can anybody remember what happened when the old PSIS hit trouble?

Are these changes open for public submissions? I’d like to see the bank not just have DTI options but also debt-to-property-income DTPI limits. Take the estimated rent (lots of ways to calculate) and multiply by 10-20 and that’s the mortgage limit for an investment property. Stabalises bubbles - when prices are leaving rents behind, less money getting pumped into the system. No effect on first home buyers, big effect on property speculators (versus investors who buy for yield).

From the article,I am uncertain as to what Adrian Orr wants in respect of a specific Deposit Insurance,but if he is thinking along the lines of $500,then he is living in dreamland.
NZ needs a proper DI scheme and I would have at least the figure of $10,000 proposed by the IMF. The present policy on OBR is unrealistic. If a major NZ bank was in serious trouble,there would be rumours round the market. In such a febrile atmosphere, depositors-many of whom have no idea what OBR means-would start to get twitchy and that could rapidly turn into a bank run. There would then be contagion and the political pressure on the government of the day to 'do something',would be immense. That 'something' would of course be a guarantee. Considerations of moral hazard would be swept away.
Right now,we have the worst of both worlds.