Parliament’s Inquiry into Banking is starting to take on a life of its own.
But what might start to worry the Prime Minister and the Finance Minister is that if they thought the Committee was simply going to deal to the retail banks, though it may well do, it is now hearing evidence suggesting the real problem is the Reserve Bank.
The Beehive’s hopes were evident in a press statement last night from the Prime Minister directed at the Infrartucture Investment summit opening in Auckland this morning.
“Our banking sector is also in for a shakeup,” he said.
“We want more competition and have put the major four Australian banks in New Zealand on notice.”
But it may not be as simple as that.
Because the Reserve Bank is independent that may make solving some of the problems difficult.
Otherwise, the impact of controversial climate change reporting legislation which farmers are complaining about was originally voted for by National.
However the Reserve Bank may be the biggest challenge.
There was some powerful evidence last month from a former Westpac lawyer, now university academic, Simon Jensen, backed up by another academic and former banker, Andrew Body, that the Bank was overstaffed, had a far too conservative view of risk and thus imposed high compliance costs on the whole banking system.
“New Zealand is an outlier internationally in relation to a number of policies it has imposed (some of which have come at significant cost to consumers) who ultimately bear the cost.”
Risk is at the nub of the farmers’ issues with banks.
Because the Reserve Bank requires the banks to hold a higher percentage of each farm loan in reserve assets than it requires for urban housing loans, so farm mortgage rates are higher.
The Reserve Bank requires banks to hold sufficient reserve assets to cope with a one-in-two-hundred-year financial crisis.
“That simply doesn’t make sense,” said Waikato Federated Farmers’ Chair of Economics and Finance, Garry Reymer, appearing before the Committee yesterday.
“Pastoral farming has been, and historically been, one of the best and safest, most profitable sectors of the New Zealand economy.
“It is a pillar of our economy; it has been treated as a higher-risk industry, and we think this is without justification.
“To put this into perspective, agriculture debt currently sits at around $63 billion while home loans exceed $300 billion.
“If risk is a real concern, why are farmers disproportionately burdened with a higher requirement for retained capital?”
Three Bank CEOs appearing before the Committee agreed the Reserve Bank’s risk weighting policies were conservative.
ASB chair Dame Therese Walsh said her bank believed the Reserve Bank was corrected when it adjusted the reserve asset ratios in 2019.
“We did need to increase the capital settings in New Zealand,” she said.
“So we were supportive.
“Probably where we differ is that possibly it doesn’t need to go as far as it is going.”
The Bank’s CEO, Vittoria Shortt, said the bank had submitted in 2019 to the Reserve Bank that the reserve asset levels should be lower than the bank was proposing.
National Rangitikei MP, Suze Redmayne, asked ANZ CEO Antonia Watson what she would do to lower lending rates to farmers if she had a magic wand.
“If I had a magic wand, I would ask the government, you, regulators, just take a step back, look at our risk weighting on an internationally comparable basis,” she said.
“At the moment, we have a lot of conservatism in our risk-weighted assets.”
Watson said New Zealand should compare its asset ratios with other countries around the world.
“I think you would acknowledge that New Zealand is a more risky country. I think there’s absolutely reason for New Zealand banks to hold more capital for all the reasons we’ve talked about, , tourism, export -led economy, driven by product produce prices, subject to natural disasters, all those kinds of things.
“So, I think New Zealand is more risky, but once we’ve got those facts we sit down as a country and say, where on that risk spectrum do we want to be?
“How much prudential risk do we want for the banks compared to allowing more competition, those sorts of things.
“And I think that’s a conversation for New Zealand, not a conversation for me as a banker.”
Ultimately, any change is up to the Reserve Bank, which has operational independence in setting capital requirements.
That renders the Finance Minister relatively impotent.
But in a July 2019 note to then-Finance Minister Grant Robertson, prior to the introduction of the one in two hundred years risk standard, Treasury said: “In light of the significant impacts of the proposals, we think it is appropriate for you to engage informally with the Reserve Bank to obtain comfort that it is following a robust process, will take into account key considerations, and will consider the impacts of a full range of options, before it comes to final decisions. “
Jensen believes the core of the problem is the culture of the Reserve Bank.
“The Reserve Bank has openly adopted a very conservative attitude to prudential regulation,” he said in his submission.
“New Zealand is an outlier internationally in relation to a number of policies it has imposed (a number of which have come at significant cost to consumers) who ultimately bear the cost.”
But there are also legislative requirements, the consequences of which the Committee is asking questions about.
In 2021, the Labour Government, with support from National) introduced the Financial Sector (climate-related disclosures and other matters) Amendment Act, which required large banks, alongside other financial institutions, to make mandatory climate-related disclosures, covering activities like business, investment, lending, and insurance starting in 2023.
The BNZ has been the most rigorous among the banks in its application of the Act and has said it would not lend to new coal mines from this year or to service stations beyond 2030 to reduce the emissions it must report.
All the New Zealand trading banks except the ASB and the ANZ belong to the Net Zero Banking Alliance, a UN-convened, industry-led initiative that brings together leading global banks committed to aligning their financing activities with pathways to net-zero emissions by 2050 and setting interim targets for 2030 or sooner.
However, six major American banks have left the Alliance since December last year, and Federated Farmers has called on the New Zealand banks to follow them out.
But BNZ Chief Executive Dan Huggins argued before the Committee that exiting the alliance wouldn’t change things because it still had to comply with the New Zealand reporting legislation, which ultimately meant achieving net zero emissions by 2050.
ANZ CEO Antonia Watson took a different view.
“We see our role as financing the transition and reducing our own emissions,” she said.
Nevertheless, the New Zealand legislation means the banks can not stand back and do nothing.
“If you have a look at ASB’s finance emissions, about 83 % of those are to the rural sector. So that tells us. here’s what we need to focus on,” said ASB CEO Shortt.
“How do we support transition? By talking to our customers about their plans, understanding those plans, and then helping support them in essence with capital to be able to execute on them.”
National is in a bind on this issue. It voted for legislation that requires banks to “assist” their customers in transitioning away from greenhouse gas emissions.
It would therefore be politically difficult to repeal, though it is likely the Government will come under pressure from Federated Farmers, ACT and NZ First to do that.
The Reserve Bank capital requirements issue is also difficult.
Any decision to change them will be a decision for the next Governor of the Bank.
And the appointment of the Governor is in the hands of the Bank’s board, not the Finance Minister.
This Inquiry is becoming a real challenge for the government.
