ere are more questions being asked about the Reserve Bank’s ability to regulate the banking industry.
Treasury has questioned various of t the Bank’s roles and yesterday Finance Minister Grant Robertson announced that a Treasury Official would be a non-voting member of the Bank’s new Monetary Policy Committee.
At the same time, a paper by the former chair of the BNZ, Kerry McDonald, which is highly critical of the Reserve Bank is being circulated among media and others.
McDonald was a member of the BNZ board from 1991 to 2008; its chair from 1996 to 2008 and a member of the board of its Australian parent, NAB, for part of that time.
He argues that the Reserve Bank does not actively assure itself that our trading banks are safe and capable of withstanding financial shocks.
“New Zealand has an unfortunate history of weak and incompetent government regulation and oversight, of complacency and failing to hold people and organisations to account,” he says.
He cites the ongoing occupational health and safety issues and then the way the great financial crisis impacted into the finance companies.
“ The first cost many lives and injuries over many years and the second billions of dollars of personal savings and wealth during the GFC,” he says.
“I am seriously concerned that we are on the same path with the Reserve Bank and the regulation of the banking sector, with a similar potential for bad outcomes.”
McDonald’s fundamental complaint is that the Reserve Bank simply asks the questions the trading banks rather than actively investigating their books.
“The present position is that the RBNZ does not know whether the banks which it has licensed to operate in New Zealand are abiding by the terms of their banking licences.
“The banks are simply required to attest that they are but there is no review, examination or audit process, which is naïve in the extreme!
“This is not tiddlywinks!”
In Australian banking regulation is carried out by the Australia Prudential Regulation Authority (APRA) .
It is the Authority’s sole role, a fact that a previous chair, John Laker, has cited as a reason for its successful management of the banking system during the GFC.
APRA has a ‘single purpose’ mission to ensure that, under all reasonable circumstances, regulated institutions meet their financial promises to depositors, policyholders and superannuation fund members,” he said in a speech in 2010.
“We are not distracted from that mission, or conflicted, by what is seen as ‘highly politically sensitive issues’ such as consumer protection and anti-money laundering work.”
McDonald says a key difference between APRA and the Reserve Bank is that APRA actively enquires, probes, tests and challenges and identifies issues.
“The RBNZ does none of this, so everything looks fine – but the reality is they simply do not know!
“They simply rely on attestation, in circumstances in which it is simply not credible!”
He says it is of particular importance that the New Zealand boards of the New Zealand licensed banks are required to make all important decisions in relation to and in the best interest of the New Zealand bank, and are expressly not allowed to act in the interests of a holding company – such as the parent bank.
“But the RBNZ simply does not know if this is being complied with – again a critical issue.
“It simply – again and naively relies on attestation without audit or other serious testing or enquiry.
“In all my time as a director/Chairman of one of the four trading banks I was never formally interviewed or tested on regulatory matters.”
He says that the Reserve Bank consistently ignores the interests of customers, which will often differ from those of the bank.
So he is proposing that the Financial Markets Authority — the government financial markets regulatory agency— take over the regulation of the trading banks from the Reserve Bank.
There is no response so far from Robertson to this proposal and probably unlikely to be one till later in the year.
And so far National has said little
Its Finance spokesperson, Amy Adams, yesterday was more or less neutral on the new Committee structure to set the OCR.
She said National had reservations that the move to make a significant proportion of the committee ministerial appointed external members, and enabling a senior Government official to be part of all decision making meetings (albeit not voting), “creates a real risk of unwarranted political influence over Monetary Policy settings.”
This whole debate about the Reserve Bank is the first real debate about reviewing any of the 1980’s “Rogernomics” economic reforms that we have seen.
It may therefore prove to be one of the most significant debates of this Government’s term.