By Gareth Vaughan
Adding explicit depositor protection to New Zealand's banking supervision framework should be on the agenda for phase 2 of the Government's Reserve Bank of New Zealand Act review, says financial consultant Geof Mortlock.
With phase 1 of the review focusing on monetary policy, phase 2 - due to get underway in coming weeks - is expected to focus on the Reserve Bank's financial regulation, or prudential regulation of banks, insurers and non-bank deposit takers such as finance companies, building societies and credit unions.
Speaking to interest.co.nz in a Double Shot interview, Mortlock said he'd like to see an explicit depositor protection function added to the supervision role.
Mortlock is a former senior official at both the Reserve Bank and the Australian Prudential Regulation Authority. He now provides consultancy services for the likes of the International Monetary Fund, World Bank, Financial Stability Institute and KPMG.
In a recent interest.co.nz article Mortlock called for the regulatory functions to be moved out of the Reserve Bank and into a new, separate regulator. And he'd like to see the current situation, where the Reserve Bank has no explicit statutory objective to protect bank depositors or insurance policyholders, change.
"I would like to see an explicit depositor protection function woven into the supervision role so that the supervisors have a much, much sharper focus on what they're actually doing and why they're doing it. Secondly I think we do need a deposit insurance scheme in this country. We are one of the very few countries in the advanced world now without one," says Mortlock.
The Reserve Bank has its Open Bank Resolution (OBR) Policy, a tool that could be used on a failed bank. (Here's a look at how the OBR might work if it was used). Mortlock says he doesn't disagree with some aspects of the OBR, because like the proponents of the policy, he doesn't want to see taxpayers' bailout banks.
"But they [the Reserve Bank] have got the worst of all worlds. They've got an Open Bank Resolution Policy that would apply haircuts to depositors, and no protection for mum and dad depositors who have no show of really protecting themselves, let's be realistic about that," Mortlock says.
"Now, the Reserve Bank talks about a de minimis exemption from the OBR, but there they're only talking about $500, maybe $1,000, per account that would be exempt from a haircut. [Governor] Adrian Orr talks about that giving them sandwich money. I don't think they need sandwich money. I think they need money to pay the mortgage, to pay the rent, to keep the kids at school and to pay the medical bills."
"So I think that what we're talking about is something very different from the bare bones de minimis exemption that the Reserve Bank is talking about. We're talking about a properly funded and structured deposit insurance scheme that provides a meaningful level of protection to depositors," Mortlock says.
A $50k per depositor insurance scheme?
All locally incorporated banks with more than $1 billion dollars of retail deposits have been required to prepare themselves for the potential use of the OBR policy. Mortlock notes this excludes the likes of building societies and credit unions that aren't big enough to meet the $1 billion threshold, but still have thousands of depositors creating a "deeply unsatisfactory" situation.
Asked how much he believes a New Zealand deposit insurance scheme should guarantee per depositor, Mortlock suggests about $50,000. That's significantly lower than in Australia, where the Australian government guarantees deposits up to A$250,000 per person, per authorised deposit taker. Mortlock notes by international standards this is very high.
"If one looks at Europe it's €100,000 per depositor, per bank. I think that is even quite high. The figure I would be looking at would be maybe $50,000 per depositor per bank on a single customer account basis. And I stress the single customer account approach because the danger of the Reserve Bank's approach is they'll say we'll exempt a certain amount per deposit account. Well there's nothing to stop you and me and anyone else from saying 'okay we're going to create 100 new deposit accounts in the one bank spread out across those 100 accounts, be exempted from up to $100,000 or more, because they don't apply a single customer view.' Well that's crazy."
In 2013, when a haircut was imposed on Cypriot depositors, then Prime Minister John Key rejected calls for deposit insurance to be introduced in New Zealand. Key argued it would prove too costly for consumers because banks would pass on the cost of any deposit insurance levy to consumers. At the time this view, and the Reserve Bank's view that a deposit insurance scheme would increase moral hazard, were rejected by Auckland University's David Mayes.
Treasury modelling last year suggested introducing deposit insurance could see savers pay a couple of dollars a year for every $1000 of deposits up to a limit of $100,000.
New Governor Adrian Orr appears to have a more pragmatic view on deposit insurance than the Reserve Bank's strong opposition to the concept over the years. In a recent Double Shot interview Orr told interest.co.nz; "I think that [deposit protection/insurance] is 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."
The case for a new entity to be the prudential & AML regulator
Meanwhile, Mortlock says the idea of shifting prudential regulation out of the Reserve Bank and into a newly created entity is to give it the focus it deserves.
"The concern that I have, and I think a number of people out there have, is that the Reserve Bank is focused primarily as it should be on monetary policy and price stability because that is its primary mandate, indeed that's what the Act says," Mortlock says.
"The risk of that is that it is distracted from and not as committed to, as it ought to be in my view, the prudential supervision function. They are a broad based central bank they have in fact a broader range of functions than central banks in almost any country I can think of. And that means that the prudential function is pretty much a poor cousin to monetary policy, to the oversight of the exchange rate etc."
He points out that currently, the Reserve Bank has a very wide range of powers compared to most central banks in the OECD with responsibility for monetary policy, foreign exchange reserves management, currency intervention, operating significant parts of the payment system and securities settlement system, prudential regulation of banks, insurers and non-bank deposit takers, anti-money laundering (AML) oversight for banks, insurers and non-bank deposit takers, regulation of the payment system, financial stability oversight, macro-prudential regulation and currency management.
Moving prudential regulation into a new agency would establish a cleaner set of objectives, a stronger governance arrangement and organisational culture and focus, he argues.
"It would remove conflicts of interest with the broader range of functions that a central bank has, and it would remove, I believe, the excessive concentration of power that currently exists within the Reserve Bank," says Mortlock.
In the video he explains why he doesn't think the Reserve Bank's prudential regulation responsibilities should be shifted to the Financial Markets Authority or the Australian Prudential Regulation Authority, and why he doesn't believe adopting the Australian regulation model would see NZ import problems highlighted in Australia's Royal Commission.
Mortlock suggests this new regulator could also take over the FMA and Department of Internal Affairs' AML oversight roles, thus combining NZ's existing three AML regulators into one. The Reserve Bank currently has about 52 staff focused on financial regulation and Mortlock suggests this could be increased to about 70 under a new regulator, with the AML staff from the three regulators also shifted across.
"I would not want to see a bloated regulator, the budget would not need to be much bigger than it currently is," says Mortlock.
He notes the International Monetary Fund last year judged the Reserve Bank to be non-compliant in 13 of 29 international bank regulatory and supervision framework standards.
"So I think it is time for a change that I hope would bring about more effective regulation."