By Gareth Vaughan
Discussing potential bank failure is a frightening topic at the best of times.
Although thankfully none of New Zealand's banks fell over during the Global Financial Crisis, the TV images of customers queuing to get their money out of Northern Rock, and memories of the chaos that hit global financial markets when Lehman Brothers went belly up, remain etched in my mind.
But although our banks survived intact, with the help of both the Crown retail deposit guarantee scheme and the Crown wholesale funding guarantee scheme, New Zealand as a society has experienced the recent pain of dozens of finance companies crumbling with individual investors in some cases losing the shirts off their backs and taxpayers carrying the can for the thick end of $1 billion, largely due to South Canterbury Finance. And insurer AMI also met its Waterloo after the big Canterbury earthquakes.
Many of us are old enough to remember the Government's bailing out of BNZ with hundreds of millions of dollars of taxpayers' money in 1989 and 1990.
So when the Reserve Bank's Head of Prudential Supervision Toby Fiennes speaks about the prudential regulator's approach to risk management, it's worth listening. Fiennes did this last week in a speech to the NZ Society of Risk Management, which I covered here.
However, I found some of the what he said stuck in the craw with the overall impression of a regulator too set in an ideological mindset and not adopting a pragmatic enough approach.
No on-site reviews
Firstly, there was Fiennes' comment that, in a move unusual for international regulators, the Reserve Bank doesn't conduct on-site reviews.
"We believe this can give rise to moral hazard. Detailed on-site inspections reduce the incentives on management, as well as increasing the possibility that a failure will be seen as a 'supervisory failure' and therefore make government bail-out more likely," Fiennes said.
Frankly that comment sounds like butt covering.
I heard recently from a senior New Zealand bank executive about a visit to their bank from Australian Prudential Regulation Authority staff. The Aussies were escorted by uncomfortable looking Reserve Bank staff, as those from across the Ditch asked their questions.
Now, I'm not suggesting on-site visits are the be all and end all of bank, insurer or non-bank deposit taker regulation. And as demonstrated above at least some Reserve Bank staff set foot inside bank HQs from time to time. But it strikes me that simply visiting say, ASB's state of the art Auckland headquarters to have a look around and see how banks are operating in the digital age and asking a few questions, can't hurt.
At the very least it may give some idea of what the culture inside the bank is like.
No favours for the big boys? Pull the other one
Fiennes was also at pains to say a punch drunk big financial institution wouldn't necessarily receive favourable treatment over an on the canvas minnow. Financial intermediaries "can and will be allowed to fail," he said.
With my taxpayer's hat on I like the sound of that. But I also realise that as tough as the Reserve Bank wants to talk now, should the proverbial hit the fan events will probably be taken out of its control.
Witness the hasty implementation of the Crown retail deposit guarantee scheme in 2008. In 2012 Michael Cullen, Finance Minister when the Scheme was introduced, told me New Zealand had been forced into a much more comprehensive, open ended scheme than had been under consideration by the "panicky" actions of Australian Prime Minister Kevin Rudd.
What that emphasises is the political pressures that would weigh down on number 2, The Terrace in a time of crisis from both sides of the Tasman.
Because if one of our big four banks is in serious trouble, it's likely its Aussie parent will be too, and potentially the whole financial system given how dominant the big four banks are with their interconnectedness on both sides of the Tasman.
The Reserve Bank may be allowed by the Government to apply haircuts to savers' deposits via its Open Bank Resolution Policy if one of the country's smaller banks goes under. But it's simply not believable that a government would stand aside and let it do this to a big bank holding tens of billions of dollars worth of voters' deposits.
Competition is there but makes few major inroads
Fiennes also made much of the efficiency of our financial system, saying this efficiency helps create opportunities for new entrants, products and services.
"Within an overall stable financial system in New Zealand, there is ample scope for new entrants. Over the last six years the number of banks registered has increased by 50%, from 16 to 24. And in just the last 12 months since the insurance legislation came fully into effect, we have welcomed two new insurers to the market," Fiennes said.
Although I'm not disputing the numbers in terms of new entrants, and I do see real retail banking alternatives to the big four banks through the likes of locally owned Kiwibank, the Co-operative Bank, TSB, SBS and Heartland, the reality is the big four still own this market. The big four hold in the vicinity of 90% of total system assets. And as the Reserve Bank itself pointed out in May; "The New Zealand banking system is highly profitable in an international sense."
Questions to pose here include although there are realistic alternatives to the big banks, why are the big boys able to maintain their combined dominance year after year? Can this last? And is it good for New Zealand?
As prudential regulator the Reserve Bank focuses on maintaining financial stability rather than helping foster competition. In theory the latter issue is the Commerce Commission's job. But it allowed a deal earlier this year that gave IAG 66% of the home and contents and vehicle insurance market, which doesn't send consumers an encouraging message about competition.
Lastly I'd suggest that using a quote from the CEO of Goldman Sachs as an exemplar in a speech on financial markets risk management is probably something best avoided.
"In a recent report by Credit Suisse, Lloyd Blankfein, CEO of Goldman Sachs, emphasised the importance of focusing on real risk adjusted returns in banking, highlighting that it is not possible to shoot from the hip and generate sustainable returns," Fiennes said in his speech.
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