David Hargreaves wonders if the push-back, particularly by the Big Four Aussie banks, against the RBNZ's capital proposals may ultimately prove to be counter-productive

David Hargreaves wonders if the push-back, particularly by the Big Four Aussie banks, against the RBNZ's capital proposals may ultimately prove to be counter-productive

By David Hargreaves

Regardless of how the Reserve Bank’s review of bank capital ends up when the final announcement is released in November, the whole process may ultimately be seen as something of a watershed for NZ banking.

For those who have followed the Reserve Bank decision making process over the years there's a well- choreographed order of events when  it comes to proposals that affect the banks. It goes like this: The Reserve Bank puts out what it wants (or at least says it wants), the banks, particularly the Big Aussie Four, then all stick the size 12 boot into the proposals behind the scenes, the Reserve Bank comes back with watered down proposals, these are implemented and on we go.

This time, with the capital review, it has felt a bit different.

I earlier used the term ‘says it wants’ in describing RBNZ proposals because I’ve always presumed the RBNZ, like any skilled retail barterer, starts out publicly seeking more than it wants in the certain knowledge that it’s going to get ‘knocked down’ by those it’s seeking to ‘sell’ its proposals to.

It’s probably fair to assume therefore that there was some element of that in the RBNZ’s, I will call it opening gambit, calling for a close-to doubling of the high quality capital held by banks over a five-year period. I guess the variable in this is that the current Governor of the RBNZ Adrian Orr is a pretty hard-edged operator in comparison with predecessors, so, with him I feel it is a little harder to discern what might be a certain amount of ‘the usual’ posturing or is simply someone used to calling a spade a shovel, and er, digging in to seek something they really want.

That the banks, particularly the Big Aussie Four, would push back on the proposals was as inevitable as daybreak. But the hysterical, not-budge-an-inch, stance particularly the Big Aussies have taken in this instance has potential, I think, to inflict real long-term damage on them.

All this of course is happening in what has become for NZ’s largest bank ANZ an, ahem, accident-prone year. And while the travails of the ANZ are not exactly ‘proving the point’ for the RBNZ they are certainly not helping the ‘we are responsible people who know our business and don’t need reining in’ kind of narrative the big banks are trying to push. One wonders what the other Big Three Aussies have been thinking and saying about ANZ at a time when there is this collective big-bank push-back against the RBNZ. You can’t imagine they’ve been thrilled.

More is good

For the record, my position on this is that I’m not sure the banks need as much capital as the RBNZ is suggesting – but more will definitely be good.

I suspect the RBNZ will have always been open minded about somewhat diluting its proposals – but with Governor Orr showing clear irritation at the tone of some of the banking submissions, the risk for the banks now is that the RBNZ will dig in and the banks might actually face more rigid proposals than the RBNZ possibly would have accepted at the start of the process.

That’s pure conjecture on my part, but the risk with pushing any point too far is that the guy you are pushing against will push back harder.

Which is where I come to the whole counterproductive side of the big banks’ submissions and arguments.

The big banks have got some good traction through the very unquestioning mainstream media with such glib arguments that customers’ interest rates on borrowing will go up X percent. Well, sorry, how on earth can you say that?

Look, it’s fair enough to say that if the cost to you of something goes up X percent then in order to make the same return as you’ve been making you would need to charge the customer X percent more. Yeah, fine. You can say that in a kind of demonstrative way.

The market will decide

But of course the market will decide what exactly you can charge. For banks to say that mortgages will go up X percent, to actually name figures, is spectacular nonsense.

Okay, if all the banks decided to charge the same rates, then maybe prices could be pushed up by a definitive amount. In such an instance you would think that the likes of the Commerce Commission would get fairly interested fairly quickly.

Underpinning a lot of the ‘logic’ and rationale coming out of the banks appears to have been an underlying line in the sand that shareholders can’t and won’t accept lower returns.

The returns have been pretty good.

There’s this idea in business that dividends must keep getting bigger and bigger.

I do believe there is something to the thinking that says if a business is not growing then by definition it will start contracting and then maybe that’s a slippery slope.

But growth and constantly squeezing the golden goose shouldn’t be conflated as meaning the same thing.

Sometimes in order to properly achieve growth then a business should retain capital and that’s sensible and it’s pragmatic.

When shareholders go feral

Look, I’ve been to enough shareholders’ meetings to know that the mood can get pretty ugly when the dividend’s cut, but sometimes you have to, and the banks need to be big enough to actually accept that they’ve been getting uproarious returns and paying fat dividends in recent years. They don’t have a divine right for that always to be the case.

The banks have, I think, conveniently bypassed the fact that the RBNZ’s asking them to raise their capital levels across a five year period. That means, yes, pay some lower dividends and hold on to some cash.

In all this I’ve sensed that the banks on many levels ‘don’t get it’. Do they actually believe the adverts they peddle that shows them being all about the customer? I haven’t taken a straw poll on it, but I suspect the customers don’t believe the ads.

I think the banks might be genuinely shocked – although they shouldn’t be – with what people do think of them.

In life, you have to understand yourself and how others view you. And I’m not sure banks do. People tolerate banks because everybody has always needed one.

Change, change, change

Will people need a bank in future? Well, you see that’s the big question isn’t it? I really think the day is not far away when people will no longer need banks.

It’s comparing apples with oranges, but I can relate some thoughts of my own industry, journalism. Back in the mid 2000s I was working for a metropolitan newspaper and it was going like a rocket. Such was the roaring state of the housing market that the paper was actually having to print extra sections on a Saturday to accommodate all the adverts. Licence. To. Print. Money.

But I was vaguely aware of this thing called the internet. And I remember thinking, back in about 2005: “You know, this is the last great age of newspapers. It’s all downhill from here.” And lest I’m seen as trying to make myself sound too clever by half, I should say that my pick for the decline of newspapers was for it to happen in about a 30 year period. Well, boy, I was wrong there. The paper I worked for now has a circulation of less than half what it was at that time.

When banks may no longer be necessary

Okay, different industry sure, but it’s indicative of the massive structural change that technology can force. And there’s no reason to believe that we are not on the cusp of something pretty big happening to banking and how we handle our finances. Cash is likely to disappear pretty soon. Crypto? Well, if Facebook’s got anything to do with it that could be just around the corner in a widespread-usage sense.

Which is all why the banks by being unbelievably churlish now and appearing unwilling to give any ground might be self-harming themselves.

The public don’t love banks, they’ve just needed them. If it comes to a point they don’t need them then they will remember how the banks have acted and reacted at times like this.

I would suggest the banks might want to bear that in mind when they decide how they will respond to whatever the RBNZ does finally decide on in November.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Good article - fair warning, but I suspect the banks, at this point, just don't care.

Great comment and not just because I agree with it.

‘we are responsible people who know our business and don’t need reining in’ hmmm, try telling that to the NZ investors who lost a combined $110m in that ponzi scheme, RAM, who's bank either was completely inept or complicit. Time will tell.

In the context of this...

For goodness sake. What do they do in their back office?


The RBNZ proposals in isolation may look “excessive”. But looked at in the context of what is going on globally – with debt reaching unprecedented levels, and QE / low rates commonplace – I think shoring up the financial system could prove to be an incredibly important decision for the long term future of NZ.

… Assuming it doesn’t all blow up in the next couple of years.


Remember, The banks are implicitly aware that there's always a taxpaper bailout in a worse case scenario. It's unlike any other business environment. In so many ways, the easiest money in town.

Won't the deposit holders be the first to take a hit under OBR?

No, first the losses are taken by shareholders and subordinated debt holders, after that deposit holders. OBR temporarily freezes a portion of deposit holders funds, but these are not immediately used to cover banks losses.

The real question is would a crisis actually get to the point of invoking the OBR. It is not a guarantee or requirement to invoke OBR, and its a decision made by the minister of finance (as one of numerous options).

The reality is if the public starts doubting the stability of banks it will result in more and more people starting to shift money out. This leaves the government two options ... allow the withdrawals continue, creating a feedback loop making bank failures inevitable. Or, they step in, and provide additional guarantees to ensure people stop removing money.

Will a government let it get that far? Unlikely. So while the OBR exists, the odds of it being invoked aren't particularly high.

Which, is why the capital requirement changes are so essential.

The reality is if the public starts doubting the stability of banks it will result in more and more people starting to shift money out.

The actual reality is that joe-public will be the very last people to know if a bank has become unstable.

That's why OBR is designed to manage the exit/failure of a bank in a comparatively orderly way. It can be triggered before a bank run takes place and before losses mount up to the point where the value of deposits are actually affected (instead of just temporarily haircut and frozen).

True...probably similar to how Harbour Asset Mgmt was the last to know about CBL, despite it being under investigation.

Yes, this is the crux of the issue.
"The real question is would a crisis actually get to the point of invoking the OBR. It is not a guarantee or requirement to invoke OBR, and its a decision made by the minister of finance (as one of numerous options)."

Death for savers = death for the Minister = death for the party.

Banks know this, so the Govt bailout is virtually assured.

No. Equity holders hit first. OBR means some of the deposit may be withheld until the extent of the losses is quantified... If losses exceed equity then and only then would it be 'taken'.

More debt/risk is only the answer if you are a under capitalized bank or PI. Similar to parasite that has become two heavy and is used to getting everything its own way. Perhaps we really do need a Royal Commission here. Changing the status quo will cause unexpected problems but good to see the RBNZ having the bravery to actually try and do something about a bigger problem being, high prices and rents and bank profits sucking the financial life out of the NZ host.

What can you do about... low debt and job/income security.

Underpinning a lot of the ‘logic’ and rationale coming out of the banks appears to have been an underlying line in the sand that shareholders can’t and won’t accept lower returns.

There is *some* merit to this argument.

From the perspective of the Australian-bank ultimate shareholders, there is no change to the balance sheet of the entity they are investing in (i.e. the Australasian/global groups of ANZ/CBA/NAB/WBC) and the overall risk of investing in that group remains the same. Capital invested by the Australian bank into in the New Zealand subsidiary is consolidated out of the financial accounts at the group level - it's akin to internal transfer pricing.

From the perspective of the ultimate shareholder, NZ is just one division of the larger business they have invested in and expect a return from. The proposals on the table do nothing to change that perspective and there isn't any particular reason why those shareholders should be satisfied receiving a lower return.


These big Aussie banks are plundering massive profits out of Kiwis .... if the property bubble bursts , will they suck it up , or lobby the government to get a taxpayer bail out ?

... got no sympathy for them .... but will happily help them drink their mighty fine wines from their oenological vaults ...


dividends should be banned until captial requirements are met

...yes ... it would only take 2 or 3 years of suspended dividends for the banks to meet their new capital requirements...

No way in hell will they do that !

The main purpose of banks is to provide loans. I can't see how crypto can compete with that. Some nutters have embraced crypto as the next new thing, but it doesn't add up if you can't use it to pay your loans off.
Forcing the banks to restrict lending, will impede growth and slow the economy. Maybe Orr wants to cause a recession?

Pssssst ! ... hey you , yes you : friend , Bitcoin is over , ka-put , last years big thing .... have I got a deal for you....

... wanna buy some Gummybeariums ?

Gummybeariums you say?

Why not! I'm in!

What's worse, a recession, or a complete collapse of the financial system?

Given the current levels of Private Debt (both nationally and globally), and the link between Private Debt and financial crises (see Great Depression, Great Recession, Japans lost decade), then it becomes prudent to look at creating a buffer now before the next crisis hits.

Of course a financial collapse is worse but how about if you re-phrase your question:

What's worse a recession now or a collapse of the financial system in the future?

I think that's a crucial point because no leader, political, central bank or business, wants the bad times under their watch, therefore the answer probably lies (and I'm NOT saying rightly so) with the second of your options

Which is why its fortunate that the RBNZ has a degree of autonomy from politicians, no?

Great article David!

Banks are free to profit off the productivity of the real world, by creating money and charging interest on that money. If their business model fails they are legally entitled to profit off the productivity of the real world by taking control of bank deposits. There is nothing in this equation that says they have anything to lose, except access to the productivity of the real world. And nobody is threatening them with that, only they are fake-threatening to walk away from the NZ market. Yea - like a leech is going to go vegetarian.

Not sure I follow the logic of your comment

Given most of the money held in NZ bank deposits have come from selling overpriced houses to the next person, from the created credit contracts, wouldnt it be also fair to say that money also isn't real world? Be consistent - there are 2 sides to the ledger. While Banks create credit, they do also have balance sheets to manage and deposit ratios etc. Remember they PAY interest to deposit holders.

Otherwise, wouldn't they just make up the money for the capital requirements.

I understand your confusion. I'm still trying to figure it all out. Here's what I got so far:
So let's step it back.
About 97% of money enters the 'real world' when somebody signs a loan contract. Or said another way - when a bank purchases a security from someone, an amount of money goes from the 'imaginary world' to the 'real world'. Once that happens and the money is 'created' into your bank account it is called a 'deposit' but it wasn't deposited from anywhere else so it's not technically a deposit. Yes you could say the money isn't real, but by now the bank and the individual have agreed it is - and it has an effect. What was not real has now become real and as you said it goes primarily to purchasing overpriced property. It has this effect in the 'real world'. But it did not come from the real world. And through interest rates, it affects the real world - ie your emotional wellbeing, your productivity created by your goods and services rendered through your time, intellectual property, effort, cleverness etc...
How can a bank print its own reserves? A bank can only create money. Money is debt. Money is a credit contract (backed by nothing but collective agreed upon imagination at this point, and an illusory allocation of authority upon the bank).
It's not that those old cold flimsy homes got any more special. It's just that their price is a function of how much imagination was spun into reality surrounding them. That's a messed up situation and nobody regulates the quality of credit allocation. In the 'real world', allocating credit to productive enterprise is a good idea. It creates jobs, it's the essence of a real economy. Credit creation directed towards assets and mere financial transactions?? Well that's what the spruikers are championing. All these guys here talking about the market being resilient based on real world considerations. We have a situation where the vast amount of money in supply is credit created for the purpose of purchasing property. The problem is the inherent value of property is difficult to find under all this speculation. Only the velocity of credit coming into the housing market keeps up the prices. That's not a market. That's a ponzi scheme. Made by banks. Paid for by generations.

great post!

Indeed. Any the big winner is bank shareholders.

"Headline in Herald Online : ANZ and Westpac credit ratings outlook downgraded to 'negative': Fitch"

As usual, the Rating Agencies are coming a bit late to the party ?


My experience of the banks at the moment is that they say customer focus and do what they like. I gave my westpac manager a good verbal shin kicking yesterday that is being followed by removal of my deposits. At some point those deposits may be turned into more real things and then I wont care if they all crash and burn.

Fine article David