And then there is the mystery as to why a temporary Governor (specifically provided for in the Act) has not yet been appointed, even though it is now four weeks since Orr tossed his toys and walked out (formally finishing on 31 March, but no longer present). I wrote about this briefly on Monday morning when it emerged (in The Post) that despite what the Minister and Bank had led us to believe on the day Orr resigned (effective 31 March), there would not be a temporary Governor in place from 1 April. The Bank’s spokesperson, quoted in the Post article on Monday so badly misread the relevant provisions of the Act that the Bank seemed to feel it necessary to issue a release yesterday, which added nothing but at least didn’t muddy the water further. The Bank’s Board has to (finally) make a recommendation of a person to serve as temporary Governor by 28 April, but even once she gets such a nomination the Minister of Finance can take as long (or short) as she likes to make an appointment (or, presumably, knock back a recommendation and send the Board away to make another).
Reasonable people would have assumed that within a few days of Orr announcing his resignation (and storming off), the Board would have met and made a recommendation. With more than three weeks notice (at least on paper) having been given there was really no excuse for not even having a recommendation on the Minister’s desk by the end of March. We are left to wonder why. Perhaps Hawkesby didn’t want the job? Perhaps the Board doesn’t have confidence in him to do even the fill-in role? Perhaps the Minister had indicated that she didn’t want him? We don’t know, and neither do international markets who (like the rest of us) were taken off-guard by Orr’s resignation. It really isn’t a good look. And if for some reason Hawkesby isn’t an option (and there are very slim pickings among the other 2nd tier managers), perhaps they could twist the arm of former Deputy Governor Grant Spencer and bring him back for a second stint filling in between Governors (only it would be legal this time)?
The unsatisfactory picture was compounded just a little later on Monday morning when Hawkesby and the Board chair Neil Quigley fronted up to the Finance and Expenditure Committee to announce that they were after all going to have a review of bank capital requirements (their opening statements are here). This had all been arranged with the Minister of Finance, who put out a simultaneous statement welcoming the review, and confirmed by the Bank’s Board at a meeting last week (which the outgoing – but still in office, and thus still a Board member – Governor did not attend).
[UPDATE: Meant to mention that Hawkesby did himself no favours – if he aspires to be seen as anything other than Orr’s man – when he opened his FEC statement this way (emphasis added)
“I’d like to begin by acknowledging our Governor, Adrian Orr, who over 7 years would have attended FEC hearings more than 50 times and always been engaging. We are looking forward to continuing that relationship.”
Orr actively misled FEC repeatedly, and the frostiness of his encounters with any questioning FEC members has been repeatedly commented on. ]
Recall that, rightly or wrongly (I think wrongly), Parliament has given policymaking powers on such matters to the Bank (and specifically to the underqualified Board). Recall too that just a few weeks ago the Minister of Finance had indicated that she was seeking advice on ways to compel the Bank to change policy. Presumably the Board – and perhaps management – reading which way the political winds were blowing simply caved and arranged Monday’s FEC appearance and announcement, rather than risk losing their powers. They were, after all, in a weak position: as far as we know the Bank’s Funding Agreement for the next five years has not yet been approved (the Minister has talked of coming cuts), there wasn’t a permanent Governor in place, and even the appointment of a temporary Governor seemed to be hanging in some sort of limbo.
It is always possible that the Bank itself (especially now minus Orr – who last year was vociferously defending current policy and, as so often, attacking any critics) thought that a review was (substantively) timely and appropriate, but it looks a lot like bowing to political pressure, at a point of particular weakness. In an independent agency. And, frankly, since I believe that big policy calls should be made by elected politicians, I’d rather the government had actually legislated to shift big-picture prudential policymaking powers back to the Minister of Finance, while retaining a vital role for a better-performing Reserve Bank to advise and to implement (essentially the model in most other areas of government policymaking).
There are also lots of questions about where to from here with the review. The suggestion from Quigley is that the review will be completed by the end of the year, but while decisions are finally a matter for the Bank’s Board, it does invite the question of what role (if any) the new permanent Governor is to have (at least if it is anyone other than Hawkesby). By law, the temporary Governor can (eventually) be appointed for six months, extendable for another three. Even if the Board gets on and advertises for a permanent Governor this month, at best it will be several months before a new Governor is on board (eg there was roughly six months between Don Brash resigning and Alan Bollard starting work). With a non-expert Board wouldn’t one normally expect the Governor to be taking the lead in formulating the advice on which the Board would finally make decisions? Or is the new person to be presented with a fait accompli?
And then of course, there are questions about the nature of the review itself. Is it purely appearance theatre (“we need to look like we are doing something”) or is it genuinely a case of an open-minded reassessment? There is talk of consulting banks before any changes are made, but what about the wider group of interested experts and commentators (many of whom submitted on the 2019 policy proposals/decisions)? And for all the talk of commissioning “international experts”, surely only the most naive would take that at face value. You choose your expert according to your interests (eg a different group if one wanted people likely mostly to reaffirm your priors than if you were genuinely opening things up). I reread yesterday my post about the “international experts” Orr had commissioned in 2019, and the rather limited (and conveniently-supportive, having been chosen for a purpose) contribution they made. Those earlier experts were barred from talking to anyone in New Zealand other than the handful the Bank approved. Will it be any different this time?
And although back in 2019 the law was such that the decisions were still those of Orr alone (the Board then had a different role), Quigley was also the Board chair then and has had Orr’s back right throughout his time in office – apparently serving the Governor’s interests more than the public’s interest. His own questionable relationship with the facts on a number of occasions has also been documented here on various occasions. Apparently Quigley presented quite well at FEC on Monday, but so what? When he isn’t under pressure – and FEC was more attuned to welcome the review than ask very searching questions – he is a smooth operator (when he is under pressure, well…..see his press conference on the afternoon Orr resigned).
My own view, back in 2019, was that even the final Orr position – which pulled back from the initial proposals – went further than was really warranted. But one of the things I’d be looking for as part of the Bank’s review this year – and as a test of seriousness and openmindedness – is a rigorous and transparent comparison of the New Zealand capital requirements (for large and for small banks) with those of other countries. The Reserve Bank made no atttempt whatever to provide those sorts of comparisons in 2018/19.
One might think of countries like Norway, Sweden, Denmark, Australia and Canada, but perhaps also advanced countries where the bulk of the banking system is made up of subsidiaries of much-larger foreign banks (for example, the Baltics). To do this properly isn’t a superficial exercise of comparing headline capital ratios. One needs to look at things like the composition of balance sheets (in a quite granular way), risk weights on individual types of exposures (standardised and IRB) and so on. One might, in principle, take the business structure of one or more New Zealand banks and actually apply the rules in other countries to see how much capital they would be required to have on those rules, relative to the rules here.
If the current Reserve Bank policy, and scheduled further increases in minimum required capital, ended up pretty much in the pack, relative to the situation in other advanced countries, it might be considered the end of the matter. There might not be anything very optimal about what those other countries have chosen to do, but the case for any revision to the New Zealand rules would be that much harder to sustain than if (for example) the full New Zealand requirements imposed much higher capital requirements on much the same sort of portfolios. There is no compelling reason to believe that the exposure to really serious adverse shocks is any greater in New Zealand than in other advanced economies, so absent a compelling argument that the rest of the world is just “too lax”, being somewhere around the median of other countries might be a reasonable benchmark for New Zealand authorities (in a world of inevitable great uncertainty). (Incidentally, there would be no point in having requirements lower than those applied by APRA, since their requirements would set a floor for the Australian banking groups as a whole – there has been too little mention of the APRA group requirements in the recent New Zealand debate).
Reviewing some old posts yesterday I also stumbled on this chart, taken from a 2019 working paper of the Basle Committee on Banking Supervision (which I wrote about here)
Reasonable people would have assumed that within a few days of Orr announcing his resignation (and storming off), the Board would have met and made a recommendation. With more than three weeks notice (at least on paper) having been given there was really no excuse for not even having a recommendation on the Minister’s desk by the end of March. We are left to wonder why. Perhaps Hawkesby didn’t want the job? Perhaps the Board doesn’t have confidence in him to do even the fill-in role? Perhaps the Minister had indicated that she didn’t want him? We don’t know, and neither do international markets who (like the rest of us) were taken off-guard by Orr’s resignation. It really isn’t a good look. And if for some reason Hawkesby isn’t an option (and there are very slim pickings among the other 2nd tier managers), perhaps they could twist the arm of former Deputy Governor Grant Spencer and bring him back for a second stint filling in between Governors (only it would be legal this time)?
The unsatisfactory picture was compounded just a little later on Monday morning when Hawkesby and the Board chair Neil Quigley fronted up to the Finance and Expenditure Committee to announce that they were after all going to have a review of bank capital requirements (their opening statements are here). This had all been arranged with the Minister of Finance, who put out a simultaneous statement welcoming the review, and confirmed by the Bank’s Board at a meeting last week (which the outgoing – but still in office, and thus still a Board member – Governor did not attend).
[UPDATE: Meant to mention that Hawkesby did himself no favours – if he aspires to be seen as anything other than Orr’s man – when he opened his FEC statement this way (emphasis added)
“I’d like to begin by acknowledging our Governor, Adrian Orr, who over 7 years would have attended FEC hearings more than 50 times and always been engaging. We are looking forward to continuing that relationship.”
Orr actively misled FEC repeatedly, and the frostiness of his encounters with any questioning FEC members has been repeatedly commented on. ]
Recall that, rightly or wrongly (I think wrongly), Parliament has given policymaking powers on such matters to the Bank (and specifically to the underqualified Board). Recall too that just a few weeks ago the Minister of Finance had indicated that she was seeking advice on ways to compel the Bank to change policy. Presumably the Board – and perhaps management – reading which way the political winds were blowing simply caved and arranged Monday’s FEC appearance and announcement, rather than risk losing their powers. They were, after all, in a weak position: as far as we know the Bank’s Funding Agreement for the next five years has not yet been approved (the Minister has talked of coming cuts), there wasn’t a permanent Governor in place, and even the appointment of a temporary Governor seemed to be hanging in some sort of limbo.
It is always possible that the Bank itself (especially now minus Orr – who last year was vociferously defending current policy and, as so often, attacking any critics) thought that a review was (substantively) timely and appropriate, but it looks a lot like bowing to political pressure, at a point of particular weakness. In an independent agency. And, frankly, since I believe that big policy calls should be made by elected politicians, I’d rather the government had actually legislated to shift big-picture prudential policymaking powers back to the Minister of Finance, while retaining a vital role for a better-performing Reserve Bank to advise and to implement (essentially the model in most other areas of government policymaking).
There are also lots of questions about where to from here with the review. The suggestion from Quigley is that the review will be completed by the end of the year, but while decisions are finally a matter for the Bank’s Board, it does invite the question of what role (if any) the new permanent Governor is to have (at least if it is anyone other than Hawkesby). By law, the temporary Governor can (eventually) be appointed for six months, extendable for another three. Even if the Board gets on and advertises for a permanent Governor this month, at best it will be several months before a new Governor is on board (eg there was roughly six months between Don Brash resigning and Alan Bollard starting work). With a non-expert Board wouldn’t one normally expect the Governor to be taking the lead in formulating the advice on which the Board would finally make decisions? Or is the new person to be presented with a fait accompli?
And then of course, there are questions about the nature of the review itself. Is it purely appearance theatre (“we need to look like we are doing something”) or is it genuinely a case of an open-minded reassessment? There is talk of consulting banks before any changes are made, but what about the wider group of interested experts and commentators (many of whom submitted on the 2019 policy proposals/decisions)? And for all the talk of commissioning “international experts”, surely only the most naive would take that at face value. You choose your expert according to your interests (eg a different group if one wanted people likely mostly to reaffirm your priors than if you were genuinely opening things up). I reread yesterday my post about the “international experts” Orr had commissioned in 2019, and the rather limited (and conveniently-supportive, having been chosen for a purpose) contribution they made. Those earlier experts were barred from talking to anyone in New Zealand other than the handful the Bank approved. Will it be any different this time?
And although back in 2019 the law was such that the decisions were still those of Orr alone (the Board then had a different role), Quigley was also the Board chair then and has had Orr’s back right throughout his time in office – apparently serving the Governor’s interests more than the public’s interest. His own questionable relationship with the facts on a number of occasions has also been documented here on various occasions. Apparently Quigley presented quite well at FEC on Monday, but so what? When he isn’t under pressure – and FEC was more attuned to welcome the review than ask very searching questions – he is a smooth operator (when he is under pressure, well…..see his press conference on the afternoon Orr resigned).
My own view, back in 2019, was that even the final Orr position – which pulled back from the initial proposals – went further than was really warranted. But one of the things I’d be looking for as part of the Bank’s review this year – and as a test of seriousness and openmindedness – is a rigorous and transparent comparison of the New Zealand capital requirements (for large and for small banks) with those of other countries. The Reserve Bank made no atttempt whatever to provide those sorts of comparisons in 2018/19.
One might think of countries like Norway, Sweden, Denmark, Australia and Canada, but perhaps also advanced countries where the bulk of the banking system is made up of subsidiaries of much-larger foreign banks (for example, the Baltics). To do this properly isn’t a superficial exercise of comparing headline capital ratios. One needs to look at things like the composition of balance sheets (in a quite granular way), risk weights on individual types of exposures (standardised and IRB) and so on. One might, in principle, take the business structure of one or more New Zealand banks and actually apply the rules in other countries to see how much capital they would be required to have on those rules, relative to the rules here.
If the current Reserve Bank policy, and scheduled further increases in minimum required capital, ended up pretty much in the pack, relative to the situation in other advanced countries, it might be considered the end of the matter. There might not be anything very optimal about what those other countries have chosen to do, but the case for any revision to the New Zealand rules would be that much harder to sustain than if (for example) the full New Zealand requirements imposed much higher capital requirements on much the same sort of portfolios. There is no compelling reason to believe that the exposure to really serious adverse shocks is any greater in New Zealand than in other advanced economies, so absent a compelling argument that the rest of the world is just “too lax”, being somewhere around the median of other countries might be a reasonable benchmark for New Zealand authorities (in a world of inevitable great uncertainty). (Incidentally, there would be no point in having requirements lower than those applied by APRA, since their requirements would set a floor for the Australian banking groups as a whole – there has been too little mention of the APRA group requirements in the recent New Zealand debate).
Reviewing some old posts yesterday I also stumbled on this chart, taken from a 2019 working paper of the Basle Committee on Banking Supervision (which I wrote about here)
Click to view
I don’t want to fixate on the individual numbers, but simply to reiterate the point that any wider economic gains from higher required minimum capital ratios abate quite quickly as those requirements are increased. Actual numbers that might emerge will depend heavily on things like assumed discount rates (the ones used in these studies are far below the standard discount rates for us in New Zealand public policy evaluation), and the ability (or otherwise) of high capital ratios to save us from financial crises with severe economic consequences (a point quite in contention in 2019, when I observed that the numbers used by the Bank and their supporters were grossly implausibly large).
(Finally, on this topic, it is worth remembering that capital buffers are very useful to absorb losses, but that what matters even more – including as regards real economic losses and dislocations – is the quality of bank assets, and thus bank lending standards. A bank can have pretty large capital buffers and yet can still go off the rails quite badly in a surprisingly short space of time if lending standards degrade and/or management/Boards start chasing lending opportunities which look fine and good in the heat of a boom only to prove anything but as the tide recedes. Probably the largest real economic losses don’t arise from a bank itself coming under stress, but from the gross misallocation of real economic resources that can occur all too easily when undisciplined or excessively risky lending occurs, and those costs are already baked in when the lending and associated real investment choices are made, even if they only become apparent when the shakeout happens.)
Anyway, we will see what comes of the Bank’s review. And if, as Hawkesby/Orr [previously]/Quigley claim, the Bank’s policies are basically right, whether they can make a compelling case to persuade the public, external commentators….and of course the Minister of Finance who, I guess, still has the threat of legislating up her sleeve.
Changing tack completely, today marks 10 years since I left the Reserve Bank. As I noted at the time, that move was something of a double coincidence of wants: Graeme Wheeler really wanted me out, and I really wanted out, to be around as a house husband for our kids. It was a great move and I’ve not had the slightest regret (indeed, one shudders at the thought that I might otherwise have been there when the Orr years started). Being available for the kids, and helping to enable my wife to hold down busy jobs, will always count as one of the blessings of my life (and a few weeks ago the youngest left for university).
Every so often I think about where to next. The blog has been less frequent in the last few years (including due to 2-3 years of fairly indifferent health including post-Covid, but now passed). Circumstances change and I’ve got busier. I have occasionally thought about shutting it down and doing other stuff – I had an outline on my desk when the BPNG appointment came through of a time-consuming project I’d still like to pursue. For now, various circumstances and considerations mean I’m going to try to discipline my public comment more narrowly. There has been an increasing range of things I’d like to have written about but it wasn’t possible/appropriate. For this blog that will mean primarily Reserve Bank things, fiscal policy, productivity and not much else, which was the original intended focus. (And if a capable, even excellent, Governor is appointed, consistently lifting the performance of the Bank, and its efficiency, openness and transparency, perhaps even Reserve Bank commentary will die away. There are much bigger economic policy challenges.)
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
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