Fallout from the Hisco affair is bound to spread to RBNZ moves to regulate bank capital

Pressure may be mounting for  a  broad  inquiry into  the banking industry following recent incidents involving  the biggest trading  bank in NZ.

Agriculture  Minister  Damien  O’Connor  said this week  banks  are  “bullies”  (according to a  Radio NZ report).  It’s a  sentiment shared  by  many  New Zealanders.

This  sentiment has  been rekindled by the departure  of ANZ’s CEO  David Hisco  who, it had been found, passed off charges for chauffeur-driven cars and the cost of storing his wine collection as business rather than personal expenses.

ANZ suffered a couple of regulatory blows last month with the Reserve Bank forcing it to hold more capital against housing and farm lending from June 30 and to use the standardised model for calculating its operational risk capital (ORC) rather than its own internal model.  That’s because it had been using a modified internal model for calculating ORC since December 2014 without first getting RBNZ approval.

Former BNZ chairman Kerry McDonald  reckons that if the ANZ board is not capable of having systems and processes in place that identify problems of this nature – chief executive spending or the way risk is managed – “then you’ve got to have serious doubts about their ability to run a bank.

So does NZ  need the  kind of  Royal  Commission into the banking industry that was  mounted across  the  Tasman?

Politicians here  may be  wary  of  instituting  an  inquiry   of that  nature,  not so  much  because it  could  take a  couple of  years to complete,  but  because with the  economy   slowing down  in the face of  global  trading wars, NZ more than ever  needs a strong   banking  system.

For  example, the government  only  this week  sought to protect   heavily indebted  farmers  through a measure  allowing them to ask for mediation  before  a bank foreclosed on  loans.  At nearly $63bn, total farm debt has risen 270% in the past 20 years and  banks are said to  be   getting  testy  with those falling  behind in  loan  repayments.

That statistic on  farm debt  is a measure of the  vulnerability  of the farm  sector but also  of the  NZ economy if export markets  go sour.

Kerry McDonald  argues  the Finance Minister should get directly involved, and it’s   time the Reserve Bank showed it could regulate the sector effectively, or that there  are wholesale changes at the central bank.

Prime Minister Jacinda Ardern,  questioned at her post-Cabinet  press conference,  said  the Hisco  affair  is an employment matter and the responsibility of the bank.

Ultimately what we are talking about here are matters of personal integrity and employment matters.  You would expect that those remain the responsibility of the board and the banks themselves.  Both politicians and those who are leaders in high-profile organisations do need to continually focus on maintaining that integrity.

As  for whether the ANZ’s  NZ  chairman,  Sir John Key,  should  step down  (another  point  raised by  Kerry  McDonald),  Ardern said the expenses issue had been acted on.

“As far as I can see the issue’s been raised, the board has acted on it and the CEO is no longer there.  Ultimately, when it comes to this sector we need to see leadership from within as well.  So those are matters for them – we know of course that we need to maintain similar standards in the political world as well.”

The fallout from  the  Hisco   affair    will  certainly   have  an  impact  on a much  broader  issue.  The Reserve  Bank  has  been  preparing to impose on  trading banks a  new  requirement to double their capital levels and to disallow their Tier Two instruments from capital  calculation.

Clearly  the  Australian-owned  banks, the dominant element  in the  NZ  trading bank system, were  unhappy  with  this demand and  have been pushing back  hard   against   Reserve  Bank  governor  Adrian  Orr.  The risk   is the Australian banks  could look  at withdrawing new lending to NZ’s productive industries, particularly  the agricultural and horticultural sectors.

Now   the Hisco  affair   may have swung  public  perceptions  even more heavily  against  the  Aussie-owned banks.

So Adrian  Orr,  with that  kind of public support to reinforce his policy,   could forge ahead  with  his new  capital  regulation.   But what then   will be  the  response of   the big  bosses  across  the Tasman?

In this high-stakes  poker game all we can  do  is hope the cards fall the right way.

 

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