Adrian Orr has been demonised as "Shock and Orr" across the Tasman.
Scare tactics get short shrift Banks' "shrill response" decried, writes Fran O'Sullivan.
Just over half of CEO respondents to the Herald survey agree the "more vociferous" banking CEOs are scare-mongering when they say they will pull back operations in New Zealand if the Reserve Bank's new capital proposals are imposed.
Across the Tasman, Reserve Bank Governor Adrian Orr has been demonised as "Shock and Orr" over his proposal to hike bank capital in New Zealand.
This provoked a strong response from the leaders of some Australian-owned banks, particularly ANZ Group chief executive Shayne Elliott, who threatened to review the "size, nature and operations" of New Zealand if the rules are imposed.
But while 55 per cent of respondents to the Herald survey agree bank chiefs are indulging in scare-mongering, a further 31 per cent — which includes the chief executives of some major dairy companies — believe the banks will reduce capital to some particular sectors including their own if the central bank's proposals are fully implemented.
Central to the belief that some bank chiefs are over-egging their opposition is the fact that they are booking good returns on their NZ operations.
"The shrill response by CEOs of some of the Australian-owned banks is appalling," said Craig Stobo, chair of the NZ Local Government funding agency.
"Just look at the profit ratios as compared to Australia (eg profit to market size ratio) and you can see plenty of headroom to increase capital," said an energy sector boss.
Other comments included: "they're full of it — NZ is their most profitable business" (funds boss), "banks still need to make a profit" (Chorus' Kate McKenzie) and "There will be impacts from these changes, but they are being overstated. There will be price adjustments, but less face it, interest rates are at lifetime lows so they are hardly likely to be earth-shattering," (a major funds boss).
Simplicity CEO Sam Stubbs said, "As an ex-banking senior executive, the banks have rolled out the standard playbook on scare-mongering. There are very few arguments they use involving verifiable numbers. The BIS assessments of NZ banks are very clear and completely verify the Reserve Bank approach."
"They probably believe this is one of the outcomes but, even though they have been important for our economy over the past few years, they are having quite a negative impact right now on the growth aspirations on NZ due to their risk framework and "fiduciary" responsibilities," said a construction boss.
The four major Australian banks dominate the New Zealand economy with total assets of $461.69 billion under management. ANZ is the largest bank with assets of $164.96b under management. BNZ is next with $105.31b; then ASB with $98.46b followed by Westpac with $92.92b. In contrast the most significant NZ bank — Kiwibank — has $22.73b assets under management.
Assets are the economic resources a bank controls. This includes tangible assets like cash and loans but can also include intangible assets like goodwill and trademarks. For most banks, loans to customers are the most common type of asset on their balance sheet.
A management consultant suggested there were some smart solutions available. "Sensible people should be put in a room to resolve this. However, banking CEOs need to realise that a managed oligopoly comes with social and strategic implications."
Other factors were also seen as clouding debate — particularly the forced departure of ANZ CEO David Hisco over an expenses wrangle.
Said a senior director: "It is unfortunate that David Hisco made the discussion emotional — because it has allowed the quality of the debate to be clouded. ANZ aside, all other banks have been doing their best to work constructively on this issue. The subject is complicated and few understand it well. The media could help by translating the complexity into ways that NZ mums and dads can understand".
A tech services head observed the scare-mongering was unfortunate: "Especially when cast against the shadow of the corporate excesses witnessed this year in the ANZ CEO debacle. The bank should have had protocols in place to stop these fiscal abuses."
ANZ's most recent results show its share of New Zealand's $62.5b agricultural lending market stood at 28.5 per cent in February.
"If the banks pull back, it is largely because they already intend to reduce their exposure to a sector and /or the country eg ANZ bank position," said an agribusiness leader.
New regulations from the Australian Prudential Regulatory Authority (APRA) were also seen as an influence. "APRA regulations will cap the level of capital Australian banks can allocate to the NZ market," said a media boss.
The Reserve Bank's website contains a summary of the submissions it received for its April 2019 consultation paper.
Earlier this year, Orr swiped back at the banks which have been putting the boot into the central bank over its proposed changes to capital requirements.
Speaking to the Finance and Expenditure select committee, Orr accused banks of "scaring the public with their aggressive lobbying against the proposed rules".
He said banks have been "suitably aggressive" in the way they have been discussing any capital requirement changes, particularly around the agriculture sector.
Orr said he anticipated any hit to bank margins as a result of the proposed rules would be equivalent to 0.2 per cent of their total margins.
"One of our major banks has been the one that has been the most aggressive in lending, and the most under-capitalised in the agricultural sector."
Chief executives are concerned that the policy battle between Reserve Bank Governor Adrian Orr and the banks is cultivating widespread uncertainty.
While 60 per cent say Orr's proposed bank capital increases have increased their confidence in the determination of the central bank to protect the system, a further 29 per cent say their own confidence in the resilience of our banking system has been undermined.
"This seems to have turned into a 'stare-down' scenario which is likely to negatively impact business in the near term," said a property chief.
Cooper and Company's Matthew Cockram said, "Orr seems to be a man on an evangelical mission — but has not yet persuaded the "unwashed" on the merits of what he proposes."
This sentiment percolates many of the comments in this year's Mood of the Boardroom CEOs survey. But there is also support for Orr. "Banks in NZ have had a very easy time of it for decades, and seem to have lobbied and scared their way into profits that are extremely high by international standards," says Simplicity's Sam Stubbs.
"In standing up to their lobbying the Reserve Bank is inspiring more confidence in the resilience of our banks. It is both necessary and refreshing."
Views among director respondents were mixed. "I believe capital should be increased, but the proposal is too much, too fast and without sufficient thought to extremely serious NZ Inc consequences. We are a little country," says one. "There needs to be a balance to what Adrian proposes and what the banks are saying. It's become too personal. Grant Robertson needs to show leadership on this topic," says another.
Dame Alison Paterson, a former Reserve Bank director, noted, "there has been significant negative comment on the proposition but no commentary at all on how the banks will deploy the additional capital and how that circulates around the financial system".
While 43 per cent believe the Reserve Bank's proposal to materially increase bank capital is a sound move to protect the financial system, some 58 per cent also say it will result in banks reducing their exposures to certain sectors like dairy and SMEs.
"Adrian Orr's objective is a good one," said a leading banker. "A strong, stable banking system is critical to the functioning of the economy. We just disagree with the extent of his proposal and the cost of that to the economy."
"The concept is sound but it has significant risk that in building in that level of protection it actually drives the downturn that stresses the system," said a property chief. "I have a lot of respect for Adrian Orr but this worries me. Proceed with caution."
Said a senior executive of a leading dairy company: "Its impact on lending in areas such as agriculture would be significant and coincide with a period of required spend to meet growing regulatory and environmental compliance requirements."
A similar concern was reflected by a transport chief: "At a time when significant investment is required in civic and national assets and we need capital to flow to growing a more productive economy we are going to drive up the cost of capital and reduce banks' risk appetite."
Executives and directors from banking and funds sectors are to the point.
• "The major Australian banks have capital allocation decisions they are required to make and they will deploy capital to the best returning areas. If NZ makes us a less profitable place for the banks to invest then they will reduce their investment here. That means that banks will restrict lending to the economy and focus that on lower return areas. There won't be anyone able to provide the additional funding at the scale required and so there will be a credit crunch which will restrict the NZ economy." — Bank director
• "It is a poorly designed proposal without a credible cost benefit analysis. It will impose a significant cost on the economy ($700m per year, forever), without a clearly articulated benefit based on a proper risk assessment. To be beneficial, It would likely to have to avoid a huge recession that impacts a substantial part of the economy, which was caused by a financial market failure. As such, it is a cost the economy cannot bear. If a case can be made to strengthen banking capital requirements, there are superior ways to do it without severely damaging not only the large Australian banks but also the New Zealand banks, not to mention their customers." — Funds chair
• "This is well outside international norms and way above the Basel capital capital ratios agreed by the Bank of International Settlements post the GFC. On top of this is the decision to introduce a deposit insurance scheme. All of this comes at a cost which in the end will be sheeted home to bank customers." — Former banker.
But a broker said the reforms were justifiable when you consider the consequences for NZ depositors of ranking behind Australian depositors in the even of major bank failure, as prescribed by Australian legislation.
"The big issue is who wears the cost," said Cameron Bagrie, former bank economist, now chief executive of his own firm. "Banks are saying 100 per cent falls on customers. Looking at bank ROE's I'd say there is scope for shareholders to wear some of it and still leave the ROE in the sector pretty healthy."
Dairy export revenue has lifted 16% to a record $27 billion.