The roll of drums sounded for many months — but the Reserve Bank’s call on how the country’s banks could withstand a one-in-200-year financial crisis landed with less of a bang, more like a whimper, last week.
At least, that’s how the markets interpreted the decision of the Governor, Adrian Orr, whose early belligerence had struck terror into the boardrooms of trading banks, particularly those with headquarters across the ditch.
By Monday, economists decided the changes, being softer than originally proposed, would prove less of a headwind to the economy than initially envisaged.
The overall level of capital required will still have to rise from a minimum of 10.5% currently to 18% — -but the banks will have longer to raise the capital. And the RBNZ softened what it will consider as tier one capital to include redeemable preference shares, offering a cheaper way to raise money.
It’s possible half of the extra $20bn banks will have to hold in reserve could come through new channels, forming a variety of instruments.
“We’ve studied, we’ve listened and analysed the issues in a very open manner over three years”, says Orr.
So with the banks being shored up to withstand a one-in-200-year crisis, can we all sleep more soundly?
Well, the people who will have to pay the cost of withstanding a banking crash might not be so happy. The Reserve Bank’s ukase could add 30-60 points to borrowing costs.
Such a rise would be particularly severe for farmers, already under financial pressure because of government action in other areas, and small business, hurting regional economies at a time when Shane Jones is splashing taxpayer money on projects to stimulate activity in those very regions.
It appears to contradict the Reserve Bank’s move in August to slash the OCR by 50 basis points to 1%, then hinting at further cuts from which it subsequently resiled , in the apparent urge to see greater stimulatory investment in the economy.
At that time, the business world seemed to be in a funk, with confidence waning, despite the Finance Minister Grant Robertson emphasising continually the country’s economic fundamentals are “sound”, and NZ’s rate of GDP growth is outpacing those of Aust, the UK, the US, Canada etc.
Of course the Reserve Bank’s independence in shaping monetary policy is paramount. And no Beehive inhabitant, from either the Right or the Left, would so much as hint at any interference in what is going on across the road in the Reserve Bank boardroom.
Yet there are those who deduce the Labour-led coalition has not been wholehearted in its enthusiasm for all of Adrian Orr’s pronouncements.
NZ Herald business columnist Fran O’Sullivan’s commentary on Saturday was headed “Orr’s vow of silence speaks volumes”.
She wrote that Orr, in a self-denying ordinance eight weeks ago, had taken a public back seat on the controversial bank capital debate as criticism from Australian banks, media, former Reserve Bank staffers, and even a business think tank,
“ … threatened to engulf him and fatally puncture his authority. It was a timely move and one the Neil Quigley-led Reserve Bank board had wanted to see”.
O’Sullivan went on to outline how the behind-the-scenes play had become obvious to her — though she was less clear on why she thinks the board had wanted to see the so-called “self-denying ordinance”.
Just whether Orr took a public back seat on the issue on his own initiative, or was prodded into it, has aroused a good deal of chatter in the Wellington bureaucracy.
Some of the chatter covers speculation that hints may have been dropped as the coalition canvasses the issue of finding a replacement for Neil Quigley, who has served on the RBNZ board since 2010 and as chairman since 2016. His term is due to end in January 2020.
Almost certainly the finance minister and his colleagues (including Winston Peters?) will have been holding internal discussions on potential successors to Quigley, and how the new regime would apply its independence in operating monetary policy.
Clearly in election year the coalition government will want its messages on the economy to be well defined, and not clouded by rather different messages from other powerful voices.
No finance minister cares for economic prophesies different from his own.
Commentators might have to wait until a new chairman is ensconced to discover whether Orr’s propensity to indulge in “self-denying ordinances” will be perpetuated — or was in fact a one-off.