That whistling sound out of Wellington has come from the Establishment as it witnesses a powerful attack on the Reserve Bank.
One volley has been fired by senior economist Matt Burgess in a research note for the Wellington-based think-tank, the NZ Initiative. In Climate of fear: How the Reserve Bank is overstepping its mandate, he documents what he maintains are serious breaches of the RBNZ’s responsibilities as regulator of the financial system, including one instance of misconduct, as it becomes unduly preoccupied with climate change.
A second volley was fired by the NZ Initiative’s chief economist, Eric Crampton, in an article posted by Newsroom. He raises questions about the RBNZ’s independence from political interference.
A third has been fired by an experienced business journalist, Jenny Ruth, in an article for Business Desk. She has questioned the bank governor’s credibility.
All three refer to the RBNZ’s recent Climate Changed report, which included a strongly worded threat to the institutions it regulates.
The RBNZ wrote (p32):
“We will promote banking sector climate change capabilities by increasing supervisory intensity on entities that are not positively progressing their climate change capabilities.”
That is an unconscionable statement from a regulator, and probably unlawful , Matt Burgess says in his report.
“The Reserve Bank cannot bully its way to lower emissions.”
The Reserve Bank is threatening stricter regulations on companies if they do not follow its political agenda, Burgess notes – but:
“The Bank has clearly overstepped its mandate.”
Burgess says the RBNZ has not established that climate change threatens the stability of the financial system and references an article which says the RBNZ tried to bury in-house research contradicting its concerns about climate change.
In this article for the Business Desk news service, Jenny Ruth accused the Reserve Bank of trying to bury its own research that found climate change is not a threat to financial stability.
She said the research contradicts many statements by RBNZ governor Adrian Orr that climate change is an existential threat to the economy and that the central bank needs to be at the centre of New Zealand’s climate change response.
Burgess is not dismissing the threat of climate change. He says:
“Climate change is real. But the Reserve Bank has misunderstood N Z’s climate change commitments and how emissions policies work. Its report does not even mention the Emissions Trading Scheme, a crucial oversight.
“As a result, the Reserve Bank is importing ideas from other central banks which do not fit with policies here.
“With looming inflation, rocketing public debt and elevated asset prices, the Reserve Bank should get back to its core responsibilities.”
The Reserve Bank released Climate Changed 2021 And Beyond on 26 October.
The report, timed to coincide with the COP26 climate change summit in Glasgow, showcases the Reserve Bank’s efforts to reduce its greenhouse gas emissions and new climate change disclosure rules for banks.
Burgess’s research note reviews Climate Changed and the Reserve Bank’s treatment of climate change more generally.
The Reserve Bank says climate change threatens financial system stability in two ways.
First, rising seas and changing weather patterns will cause financial losses. Second, the transition to a low-carbon economy will cause losses. Energy prices will be higher. Some assets will be stranded. The financial losses could lead to financial instability.
The Reserve Bank shares its view on climate change with 95 other central banks and financial supervisors in a group called “NGFS”, Burgess observes.
The Reserve Bank and NGFS are correct that climate change will cause financial losses, he contends, but neither provides credible evidence of a risk to the stability of the financial system due to climate change.
“Expected losses from climate change are not large enough to destabilise the financial system, and financial institutions have had decades to prepare. The risk to financial stability is unclear.
“The Reserve Bank Act does not mention climate change. Without showing a link to financial stability, the Reserve Bank has no legal or democratic mandate for climate change.3 Its decision to single out climate change appears politically-motivated. This threatens the Reserve Bank’s independence on monetary policy and prudential regulation”.
The Reserve Bank’s treatment of climate change is troubling, Burgess says.
• The Reserve Bank does not seem to understand how emissions policies work, or the consequences of those policies for its climate change strategy;
• It does not take into account existing financial stability protections such as minimum equity requirements for banks;
• The Reserve Bank has misunderstood New Zealand’s emissions targets;
• It does not explain, let alone provide evidence for, how its climate change disclosure reduces financial stability risks;
• Parts of the Reserve Bank’s argument on climate change are simply illogical.
Burgess emphasises that criticism of the Reserve Bank’s approach to climate change is not criticism of climate science, nor of the commitment to lower emissions.
“Climate change is real. New Zealand should meet its emissions targets. The Reserve Bank’s siloed approach does not help.”
Eric Crampton has focussed on the RBNZ’s independence in his article for Newsroom.
Winning central bank independence had been hard-fought and it has held for 30 years, he writes.
But it has just about been blown because central banks, including the Reserve Bank of New Zealand, are breaking the deal.
Crampton refers to the article by Jenny Ruth and her claim that the RBNZ tried to bury its own research that found climate change is not a threat to financial stability.
Climate change is real, and it is important. But while it will result in a lot of financial disruption as everyone adapts to rising carbon prices and rising sea levels, it will not cause the kinds of issues that threaten the soundness and efficacy of the financial system.
A 2018 Reserve Bank report, which the Bank sought to prevent ever seeing the light of day, concluded as much.
In late October, the Bank published results of stress tests checking the resilience of the insurance sector against the increase in severe weather events that may come with climate change. While more frequent severe weather events would reduce insurance profitability, insurers remained profitable and solvent. There was no systematic risk to be mitigated.
Nevertheless, the 2021 annual report of the Reserve Bank of New Zealand refers to climate change more often than it mentions inflation. The term “climate change” appears 22 times, and carbon appears 23 times. The word inflation, all on its own, is mentioned less frequently than either climate change or carbon. And the Bank’s discussion of climate policy ignores the Emissions Trading Scheme.
Central banks have a very big and important job, Crampton concludes.
Straying from that core task is dangerous
Point of Order awaits the inevitable barrage or rebuttals in response.