When the Reserve Bank sought feedback on its plans to require the country’s major banks to raise their capital reserves (so that the banking system could survive a crisis in future without a taxpayer bailout and without raiding the deposit accounts of its own customers) then – as surely as night follows day – you might have expected the banks to whine and complain. And so they have.
ANZ is this country’s biggest bank, and reportedly commands about 30% of the home loans market. The chairman of the ANZ board is former PM Sir John Key. Well, ANZ has threatened to pull its services out of New Zealand entirely if the RBNZ proposal isn’t significantly softened, or dropped altogether. Amusingly, ANZ’s lobbying gambit inspired Key’s former colleague – a guy called Bill English –to give a speech in Sydney to some Aussie financiers, in which English dismissed such threats as mere ‘bluff’:
“[Threats] to withdraw capital is, to a large extent, bluff. Australian shareholders and Australian banks do very well out of New Zealand. They generate good returns. I think they will stick around,” English said, according to the Australian Financial Review.
“So far, for all the bluster over the last 15 years, no Australian bank has taken its capital away. What does that tell me? What should it tell you? Don’t believe what they say – watch what they do.”
When banks cry wolf in this fashion, it is hard to feel much in the way of sympathy, especially given the scale of profits being extracted annually from New Zealand by the four big Aussie banks. The annualised profit by ANZ alone to the year ending March 2019 was close on $NZ1 billion. Regardless, it is the Aussie banks’ declared intention that bank customers – and not bank shareholders – will have to bear the brunt of the cost of making them safer. Incredible, really. Banking crises are risk –estimated to occur in New Zealand about as often as massive earthquakes, but most firms expect to pay for the cost of earthquake strengthening themselves. Not so with the banks.
When it comes to the risk mitigation costs arising from their own activities, the banks expect their customers to pick up the tab. Or taxpayers, as happened with the BNZ collapse of the late 1980s, and with the post–GFC collapse of non banking lenders like South Canterbury Finance. It was only ten years ago that governments had to bail 0ut a global banking system that (from the US to Scotland to the Netherlands) had been made vulnerable by the banks’ own lobbying for lax regulation and the pursuit of dodgy lending practices. If the banks have already forgotten the GFC, the rest of us haven’t.
Why The Need
Patiently, the Reserve Bank has explained the general rationale as to why banks need to retain a minimum level of capital reserves:
… This minimum requirement exists to ensure that the owners of a bank have a meaningful stake in the business, because the more the owners have to lose, the more carefully they’ll manage the bank. … So the more capital a bank has, the more money it can stand to lose before going out of business. Higher levels of capital better protect depositors. Capital requirements are the most important component of our overall regulatory arrangements. In the absence of stronger capital requirements, other rules and monitoring of bank’s activities would need to be much tougher.
In a speech earlier this year. RBNZ deputy governor Geoff Bascand likened this process to ensuring that the banks ‘have skin in the game’ and act accordingly. However, in their various submissions, the major banks have uniformly claimed that the new RBNZ capital reserve requirements are being set too high, are “unsuitable” [!] for NZ conditions, and go beyond what the Basel international banking system regulators were demanding. Unsuitable for New Zealand conditions? Are they kidding? As Bascand indicated, our banks are peculiarly exposed to international conditions. “The average New Zealand bank gets around 92% of its money by borrowing it. Compare this with the average business in New Zealand, for which this figure is about 55%.” Elsewhere in his speech, Bascand provided detailed reasons for concluding that the banks have once again, been crying wolf:
As he says, the gap between current practice and what the RBNZ is proposing is not really very large at all:
In New Zealand, at the moment, the Reserve Bank has set this minimum amount at 10.5% for total capital…14 We are proposing to increase this total minimum capital requirement from the current 10.5% to 18% for banks that are identified as ‘systemically important’ and 17% for all other banks.15
That proposed overall increase (from 10.5% to 18%) is actually made up of two separate tiers of capital. Tier one consists of higher quality capital and the rise there would be from 8.5% to 16% for banks identified as ‘systemically important’ and 15% for all other banks. As Bascand put it:
Tier 1 capital is what we regulators refer to as ‘going-concern’ capital, meaning that it helps absorb a bank’s losses while the bank is a ‘going-concern’ – in layman’s terms, while the bank is ‘still alive’. It is this high quality capital in particular that would achieve our objective of making New Zealand’s banks more resilient to severe shocks.
There is an additional “Tier 2” requirement of 2%, and in a peace gesture, the RBNZ has floated the idea that maybe this part could be waived:
The Reserve Bank also has a minimum capital requirement of 2% for ‘Tier 2’ capital, which we regulators refer to as ‘gone-concern’ capital, as it is only effective in absorbing a bank’s losses after a bank is ‘gone’ (after the bank has failed). Given that we are proposing to increase minimum requirements for the highest quality Tier 1 capital from 8.5% to 16% or 15%, our most recent consultation paper asks the question of whether this lower quality Tier 2 capital is needed as part of the capital framework at all.
Crucially, and as the RBNZ also indicates, the Tier One increase won’t pose such a major hike in practice, as it might seem to comprise on paper:
To dig even further into the weeds, of the proposed minimum Tier 1 capital requirement of 16%, the first 6% will consist of a regulatory minimum that banks are not to breach (to do so would trigger resolution or failure options), with the 10% that sits above that being what we call a capital buffer. We are proposing that the top 1.5% of this 10% capital buffer consist of a ‘counter-cyclical capital buffer’, which would be removed in the event of a large economic stress so that banks could continue to lend to support the economy during this stress period (provided of course that the bank was fundamentally healthy).
In effect, the new Tier One safety line is only about four points higher than the current average for capital reserve holdings. (Bascand: “On average, banks in New Zealand are operating with approximately 12% of such capital.”) In the event of a crisis, the banks could even use this buffer to help trade their way out of trouble. In sum:
While on the surface the proposed increase may look dramatic – indeed, it has been described by some as “radical” – the actual increase for banks would not be quite as high. The reason for this is that banks, for the most part, are currently operating well above the existing 8.5% minimum requirement for high quality capital. On average, banks in New Zealand are operating with approximately 12% of such capital. As such, our proposed increase to minimum requirements may not be as large as it appears on the surface.
So… the RBNZ capital reserves proposal is not Armageddon for the banking system. The cost of insulating themselves – and the NZ economy – against another greed-engendered banking crisis (such as the GFC) could comfortably be met by retaining some of the dividends that are currently being pocketed by shareholders. Basically, the public should be treating the hysterical reaction of the major banks to the RBNZ’s modest proposals as yet another subterfuge to jack up the fees being imposed upon us, the long suffering customers of this virtual cartel.
Footnote One: Banking (mal)practice doesn’t happen in a vacuum. The unregulated (or “light-handed” treatment of banking greed has some very direct socio-political consequences. In the wake of banking crises, people readily find scapegoats – immigrants, refugees, social ‘deviants’ – for their economic plight. The global rise of the populist right over the 10 years since the GFC has not been an isolated case. As this 2016 research paper has pointed out, this outcome has been observable again and again, since 1870 at least:
In this paper we study the political fall-out from systemic financial crises over the past 140 years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis.
Footnote Two: Across the Tasman, the parent banks for our Aussie-owned banks are facing much the same level of hikes in their capital reserve requirements. Interestingly, the Sydney Morning Herald reported two days ago that the Aussie parent banks are expected to fund most of this extra capital from the “Tier Two” measures – ie, via bonds that can be written off or converted into equity in the event of a crisis – that the RBNZ is virtually offering to waive, as a peace gesture.
Footnote Three: Nope, lifting the capital reserves won’t protect the banking system from every single form of chicanery that the banks manage to conceive.
In Sweden for instance, Swedbank may have held an admirable level of capital reserves, but it has still exploded amid allegations that (in unison with Danske Bank) it involved itself in money laundering billions of dodgy Russian funds from across the Baltic region. Reportedly, Swedbank lost 20% of its value in two days when its crooked dealings finally became public knowledge.
So yes, a high level of capital reserves won’t always stop the rain. But they’re a useful umbrella for keeping you as dry as possible, in the circumstances.
Footnote Four: To be fair, banks are not the only villains here, but they just can’t seem to help themselves. Although interest rates are almost flatlining at little above 1% , the credit card interest rates remain insanely high, with almost all of them up in the double digit stratosphere. Its highway robbery. Look at those credit card interest rates here.
IRD is getting away with murder, too. The interest rate available for money that it owes to you is falling from 1.2% to .81%, as RNZ reported this morning.
But when the shoe is on the other foot and you owe money to the IRD, the interest rate they charge is a whopping 8.35% and is actually increasing, up from 8.22% before. To repeat: at a time when interest rates are falling overall, IRD is jacking up the rates it charges the public on the monies owed to it, while simultaneously lowering the returns to the public on what IRD owes to them. There is no valid reason for this widening gap – other than the fact that IRD feels it can get away with it. Hate to say it, but this aspect of taxation really is theft.
Erin Durant, Kath Bloom
Is there any feeling like hearing a new artist – in this case, the young New Orleans born and now NYC-based singer Erin Durant – and thinking hmm, this music seems so direct and innocent it reminds me a little of those fantastic records that Kath Bloom made 30 years ago with the guitarist Loren Connors. Then in the fine print… hey, Kath Bloom is actually playing on this Durant record.
For those who know them, the Bloom /Connors records were nakedly, almost embarrassingly personal. Songs like “I Was Wondering” “ Breathe In My Ear” and “What If I Found Out” were so intense that it was like overhearing a secret confession. A couple of years ago, Bill Callahan did a beautiful version of “ The Breeze/My Baby Cries” …but probably, Bloom is still most widely known for the “Come Together” track that Richard Linklater used as the soundtrack for the most romantic scene in his film Before Sunrise.
Durant’s just-released second album Islands is full of tracks that would do the Bloom/Connors connection proud. Here’s “Rising Sun” …
The future’s not mine to play
Been calling out his name, but think I heard “No way”
I’m so tired and a little drunk
Just want you to hold me ’til my time is up..