Crackdown on the banks was not as severe as had been feared – RBNZ board might have had a muffling effect

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.

 

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