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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