By Bernard Hickey
Reserve Bank Governor Alan Bollard has told interest.co.nz in a Double Shot interview he is worried about the prospect for competitive devaluations globally and has warned against any slide into currency controls or trade restrictions.
Asked if there was a risk the New Zealand dollar would rise sharply if other nations engaged in competitive devaluations and trade controls, Bollard said that was unlikely.
"But nevertheless it's a bit worrying what is happening in terms of political rhethoric and action around competitive devaluations because I don't think it's going to help some of the countries involved," Bollard said.
"What does it do for NZ? You can think of various different scenarios with different effects, but it can't be good news for us," he said.
Asked if New Zealand would have to engage in its own currency controls or trade controls if other nations did something similar, he said: "It's not in prospect at the minute. We got through the crisis without the growth of trade protection. It would be very disappointing to see countries descend to that now."
The comments are made from 6 minutes into the second video below.
Elsewhere in the interview, Bollard acknowledged that attempts globally such as Basel III to toughen regulation on banks may not be successful ultimately as bankers were cleverer than regulators and may find ways around any new rules.
"Will they stop another 2008 criris? We're clever economists and regulators, but the banks are cleverer than us, and they're going to be ahead of us," Bollard said.
"There's going to be stuff that'll be going on that isn't what's envisaged now that's different from this time, that will be aiming to get around this stuff, so it would be a brave regulator who would say that's plugged for the future. That's always a problem regulating this industry," he said. The comments are made around 10 seconds into the second video below.
Bollard said new Basel III rules were now being introduced, some of which were similar to the Core Funding Ratio (CFR) introduced by the Reserve Bank last year to reduce the vulnerability of New Zealand banks to a freeze on wholesale funding markets similar to the one that occured in late 2008 after the collapse of Lehman Bros and AIG.
"They have plugged vulnerabilities around capital quality and quantity in those big international banks and they're going to make a difference there," Bollard said of the Basel III rules.
"They're done a few things that we don't think are necessary for our system like leverage ratios, and we're waiting to see how much national discretion we're going to have around those," he said.
'A very bad week in a very bad month'
Elsewhere Bollard talked about his experiences during the Global Financial Crisis, which he has detailed in his book 'Crisis: One central bank governor and the Global Financial Collapse"
The book is published by Auckland University Press and was the 6th highest selling non-fiction book in New Zealand last week according to Nielsen data, just ahead of a cookbook, but behind a book by professional public larrikin Mark Ellis. The first print run of 1,800 copies of Crisis sold out and a second print run of 600 has just been ordered.
"We haven't quite got to the Kiwi bloke level, but it's quite hot," he said of the success of the book.
Bollard acknowledged it was unusual for an encumbent central bank governor to write such a candid memoir of such a crucial time.
"If we'd had all the stuff the US put up with, I wouldn't be writing that book, but as it was, we came through it with a mixture of skill and luck and I reckon it's an interesting story. There's technical stuff in this, but there's human stuff as well. It's a crisis. In a crisis stuff happens. It's not all nice. People suffer. Here's a slightly personalised as well as a professional story," he said.
Bollard described the second week of October 2008 as a 'very bad week in a very bad month'. After the collapse of Lehman Brothers and AIG, countries such as Ireland and Britain started introducing deposit guarantee schemes, increasing nervousness in New Zealand's banking system.
He explained how close New Zealand's banking system came to serious disruption and what the government had done to ensure its survival.
'People were getting edgy, taking out cash'
"We didn't have that same sort of investment banking problem in New Zealand or Australia. That's them and we're us," he said of the international context.
"But by that stage we were getting phone calls from banks and from cash companies saying: could we have some more NZ$100 notes please and could you do it pretty quickly? We don't like to hear that at all because that means one thing, which is that people are getting edgy. It wasn't a bank run. We didn't get near that, but we did have to respond with extra supplies," he said.
"We take that very seriously because if you do get in a bank run it's very, very hard to stop. People were getting worried about that and at that stage we started thinking about designing a deposit guarantee scheme. We didn't want to do that. We knew it would be nasty, distortionary, there would be moral hazards, there would be bad incentive structures, there would be gaming, but we thought we had to be prepared. (RBNZ, Treasury and then Finance Minister Michael Cullen)"
Bollard said international events eventually forced the New Zealand authorities to structure and create a deposit guarantee scheme on the weekend of October 10 and 11, 2008. Australian Prime Minister Kevin Rudd announced an Australian scheme over the weekend, forcing New Zealand's hand at the beginning of an election campaign.
"At that stage we didn't have much choice. But unfortunately it was a very difficult time from a parliamentary, political, constitutional point of view because parliament had been dissolved leading up to the election. On the Sunday we were talking about, the Labour party were about to launch their election campaign. This was a very difficult time to do this."
Such a scheme would normally have to be passed through parliament before being enacted, but in this case was put in under the sweeping powers of the Public Finance Act.
Bollard makes the comments around the 4 minute 30 mark in the video above.
'All hands on deck answering 0800 calls'
"This was all tough stuff and we had to in a very short space of time suddenly make this scheme go real, and when Australia let us know at a very late stage they were doing it we thought we had until the end of Sunday to make it work, because we knew it would be very easy for funds to go out of the New Zealand system into the Australian system and it would have happened on Monday morning at 9am," Bollard said.
The Reserve Bank set up an 0800 number on the Sunday night and was ready from early the next morning with many Reserve Bank staffers called in to handle 1,000 calls that came in that day from stressed depositers and bankers.
Asked about the potential for a bank run if New Zealand had not set up a scheme, Bollard said: "We would have been in a very difficult position because money could go out of the large banks into their large Australian parents or into their Australian branches seamlessly. In addition you can only speculate what would have happened to building societies, finance companies and credit unions if people had felt that they' weren't safe"
Should the scheme have included finance companies?
"We couldn't risk not doing it because if we hadn't they would potentially all have fallen over on that Monday morning. We still do have some good finance companies left even thought the business structure of a number of them was very bad."
Costello tells NZ to 'Get real'
Bollard said New Zealand's crisis response may have been more difficult if Australian Treasurer Peter Costello had been successful in pushing through the takeover of New Zealand bank regulation by Australian authorities in 2005. He said Costello's aggressive approach may actually have backfired, bolstering New Zealand opposition to any takeover.
Bollard described in the book how Costello spoke to a New Zealand-Australian leaders forum in Canberra in April 2005 about how New Zealand needed to 'Get real' and acknowledge that it had sold its banking system to Australia and Australia's APRA should now regulate it. Bollard makes the comments about 6 minutes 40 seconds into the video above.
"We were a little surprised at the strength of his attack on that and the rest of the New Zealand contingent were too," Bollard said.
"'He said you've sold the banks. We own the system.' We felt and feel vindicated in that, that NZ neeeded to have its own ability to handle, control and buffer its financial system, even though a lot of that is operated by Australian banks. And we've got more than 20 banks in New Zealand," he said.
"In a way he actually solidified New Zealand feeling about that."
Bollard and the Reserve Bank opposed the Costello push and eventually convinced then Finance Minister Michael Cullen to allow the Reserve Bank to retain control. This included ensuring the Australian banks had local subsidiaries in New Zealand with their own boards and that IT systems were based here rather than in Australia. That forced Westpac to set up a subsidiary here and ANZ to keep its IT systems in New Zealand.
"We were very pleased a few years later that that was in place and we could do stuff," he said, referring to the measures taken by the Reserve Bank to provide extra liquidity to banks in late 2008 and early 2009.
"What we wanted to be able to do was to make liquidity available that required local securitisation of rmbs. Could that have been done if we hadn't had some of those powers? I'm not so sure we could have put liquidity into the system. We certainly wanted to be clear that if things got really bad we could bolster the NZ system even if the Australian system was going in another direction. Now luckily it didn't come to that," he said.
Bollard made these comments around the 10 minute mark in the video above.
'Funding vulnerable'
"We also found, and the banks themselves found, that that their funding was much more vulnerable than we''d thought," he said.
"When those term capital international capital funding markets closed down or nearly closed down around the end of 2008 we all got a surprise then. And that's when we needed to be able to provide liquidity to the New Zealand. We wouldn't have done it for the Australasian system. Would the Australians have done it for New Zealand? Don't know."
Bollard then explained how the Core Funding Ratio (CFR), which ensures the banks have at least 65% of their funding through long term and local sources, had helped the banks reduce their vulnerability.
"That was one lesson we did learn from the crisis. Funding is vulnerable and very short term, and we felt we needed to push it longer term. The CFR does that. The banks actually were headed in that way already. Did we make the difference or did they decide to do it? Hard to say. They've done it. They are further up the core funding ratio than they need to be at the minute," he said.
"We still look at it going a little further but we don't want to stand in the way of credit during the recovery. We've always said we'll watch that very carefully."
Supplementary stabilisation measures?
Asked whether the Reserve Bank was revisiting its examination of supplementary stabilisation measures, Bollard said central banks around the world were looking at other options to keep their banking systems stable and economies sold.
"The world is looking at what the East Asians do, which is being much more focused and quite tough about deciding what classes of people banks can lend to -- loan to value ratios and income servicing ratios -- that's quite intrusive," he said.
"Then you've got a lot of the northern hemisphere saying these capital requirements and capital buffers and potential for countercyclical capital requirements -- could we use those?
"We done a little bit of work on that and it doesn't look that sensitive a tool for us. We think the CFR might be a better tool. We think it could make a difference.
The Reserve Bank and Treasury examined a range of supplementary stabilisation measures in late 2005 and early 2006, including restricting loan to value ratios, ringfencing losses on rental properties, imposing a mortgage interes levy and linking bank capital to cyclical risk, but decided in April 2006 not to proceed.
Too big to fail?
Asked whether New Zealand's big four banks (ANZ, ASB, BNZ and Westpac) were 'Too Big To Fail' he said:
"We don't call them that. We call them 'systemically important', but that's somewhat similar. They're extremely important for the economy. It's ironic. Those big four Australian are relatively more imporant to the NZ economy than they are to the Australian economy because they're a bigger proportion of it."
Some northern hemisphere authorities had struggled with extremely complex and inter-linked banks working across multiple regulatory jurisdictions.
"Ours aren't too complex or too interconnected, but they're certainly big and tremendously important for the NZ system. That's why we have a pretty well honed toolkit of what to do in the event of problems, which we hope we'll never face."\
Deleveraging?
Asked what impact deleveraging was having on the New Zealand and other economies, he said around 3 minutes 40 seconds in to the video above:
"We don't actually know because there's more deleveraging going on than we thought would happen. We're seeing it in the household sector, the farm sector and the business sector and the government sector. It's everything. It does mean there's less money sloshing around the High Street. We're getting good export prices but they're being used to reduce debt," he said.
The Reserve Bank dramatically reduced its growth outlook and forecast interest rate track in the September Monetary Policy statement.
"I think banks are saying, gee we'd like to lend a bit more now. Rather than not returning businesses' phone calls, it's businesses not returning their phone calls at the minute. So we do need to see that turn around. We've alway said we need to see business credit pick up and business investment pickup as well. If it doesn't then growth doesn't recover, but at the minute we're less worried about that."
'Monetary Policy still potent'
Asked if rising debt had dampened the effect of monetary policy through 2002 to 2007 and was now doing the same as debt was unwound, he said:
"On the way up. Yes. On the way down. No. We think Monetary Policy is pretty effective given we never got near that zero lower bound interest rate issue that some other northern hemisphere countries got to. We think moentary policy is effective and the OCR is very effective. There's a margin between funding and lending that wasn't there before, but given that most New Zealand mortages now are either floating or very short term, it's pretty effective."
The Reserve Bank had no complaints about how banks were operating in the market now.
"They want to lend and to get back into business and back into growth. But they're all appropriately cautious about the quality of lending so we have no complaints."
Questions and some answers.
Earlier I asked our readers what they'd like to ask.
Here's a few comments from others in a previous comment stream.
Chris B - Alright Bernard, here's 4 for starters:
(1) How much gold does the Reserve Bank currently hold? What is our policy on growing this strategic reserve over the next few years?
(2) We have a grossly overvalued currency coupled with a broadly deflationary environment and an economy that will contract in the september quarter (earthquake, SCF, snow-storms etc). In these circumstances, why on earth is the reserve bank not issuing NZD in exchange for foreign reserves + gold? This will (a) act to reduce the crippling appreciation of the NZD and (b) provide the nation with a critical fighting fund which is going to be required for the next few years. He has the power - is he just chicken?
(3) Does he belive there is scope to adapt the exisiting Core Capital Ratio to enable periodic rate adjustment, as an additional macroeconomic tool targeting total money supply? Has the reserve bank considered any other tools for directly controlling Bank-issued credit and addressing the explosion of M3 that it totally failed to control last time round? (4) How does he believe the advent of QEII will impact upon the NZD?
Les Rudd These are useful questions.
Re. #3, given banks have proven they can meet the requirements without too much purple, maybe the question could be changed to,
"How, can RB adapt the exisiting Core Capital Ratio to enable periodic rate adjustment, as an additional macroeconomic tool targeting total money supply?"
a) If RB targeted higher than they presently are (say 90%) would he expect the OCR peak to be lower or higher than the current projection associated with 75%? If lower, by how much?
b) What went on here: 'You cannot implement a problem – only a solution'
http://www.infonews.co.nz/news.cfm?l=1&t=0&id=53064
"We have worked with the Reserve Bank to ensure that the speed of implementation has been slowed down on their new “prudential measures” and capital asset ratio requirements of banks. While there has definitely been a tightening on availability of capital, the implementation of these new policies will now be at a far slower pace than originally planned, thus reducing even more stress among the farming community. We argued that speed on implementation was not the solution New Zealand needed."
Perhaps Conor English was referring primarily to this:
https://www.interest.co.nz/news/rbnz-delays-introducing-tougher-capital…
?????????
If RBNZ had been able to implement their plans as they originally intended would he expect the OCR peak to be lower or higher than the current projection for the next tighening phase?
c) If effective asset/land/capital gains tax were to be implemented, would he expect the OCR peak to be lower or higher than the current projection for the next tighening phase?
d) If only one familiy home could be funded with fixed rate loans - all other loans being on floating terms only, would he expect the OCR peak to be lower or higher than the current projection for the next tighening phase?
e) If c) and d) had been implemented prior to the last tightening cycle does he think the OCR peak would have been lower or higher? In addition, would our national private debt be higher or lower?
f) Is it correct that RB can utilise macroprudential approaches as a supplement to monetary policy, without the need to change the present Act?
Cheers, Les.
Christov
Not that I was invited to ask Bolly anything......but I think the obvious first question would be is your position ever performance measured..? if so by whom...and who might be watching their performance....?
Of course you B.H. are not an insensitive dolt such as myself and so perhaps something more along the lines of....
Dr.Bollard which if any of your input to policies has had the greatest positive effect in regards to an Export Led Recovery.......over the last two years...?
Dr Bollard do you see a potential for a return to trade protectionism and if so what effect do you see it having on an Export Led Recovery...?
Dr Bollard in respect to the NZD...where in all honesty do you see it trading as fair value...? Dr Bollard......at what point would you be concerned enough to act on an over-valued NZD/USD....
Dr Bollard ...Do you have an opinion on the under-valued Yuan and the effect it has on the Global Trade position...
Dr. Bollard ...do you have reason to believe we may need to prepare for eventualities that may arise from the Yuan ...not being re-valued...knowing the Americans position on this. I don't expect to see any of these aired but nice to get it off my chest anyway.
Iain Parker
Ask Bollard this;
If the entire money supply at external international level originates as monetised debt with interest attached owed to the private banking system, and the entire money supply at the internal domestic level originates as monetised debt with interest attached owed to the private banking system, given that when a loan is drawn down only the principal enters circulation, where does the money come from to repay both principal and interest?
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