RBNZ review of bank regulation smacks of political interference, critics say

Finance Minister Nicola Willis. Photo / Mark Mitchell

The question of political interference at the Reserve Bank of New Zealand hangs in the air as it prepares to review the commercial bank capital rules, according to several long-time bank watchers and the Government’s Opposition.

At the end of March, the Reserve Bank (RBNZ) announced a plan to reconsider, and potentially loosen, its rules on the level of capital it requires the commercial banks to hold – while the RBNZ is best known for setting monetary policy, it also regulates the banking sector, an area known as prudential regulation.

Under former Governor Adrian Orr in 2019, the RBNZ undertook a fractious and much-criticised review of bank capital rules and lifted the requirements; the changes are still phasing in. The new rules make the commercial banks better able to withstand economic shocks, but the extra capital they are required to hold is expensive for the sector, a cost that flows through to bank customers.

Under the current Government, there has been rising pressure on the RBNZ to loosen the capital settings to boost economic growth. Finance Minister Nicola Willis mused on the subject in an interview with the Herald in August last year, and last month she confirmed that she was taking advice on how she might compel the bank to relax the rules.

Orr showed no willingness to reconsider whether the capital settings were too stringent. However, he abruptly left his post as governor on March 5, and it was under acting Governor Christian Hawkesby and RBNZ chairman Neil Quigley that the bank agreed to a U-turn.

The pair told Parliament’s Finance and Expenditure Committee on March 31, that, out of concern for “competition and innovation in the financial sector”, the RBNZ will hire outside experts to review the key aspects of its capital rules, including comparing the settings to those in other countries. Critics of the capital rules often argue that New Zealand’s settings are tougher and more risk-averse than elsewhere.

Reserve Bank of New Zealand Governor Christian Hawkesby, who holds the role temporarily. Photo / Mark Mitchell

Former Reserve Bank economist Michael Reddell and Auckland University professor of economics Robert MacCulloch both told the Herald that Hawkesby and Quigley’s respective circumstances appear to have compromised their ability to uphold the RBNZ’s independence from Government.

Hawkesby became acting governor on March 5, and earlier this month was made governor for a six-month interim period while a replacement is found to fill the role for a full five-year term. It is generally understood that Hawkesby wishes to retain the role. That hiring decision rests with the RBNZ board, under Quigley, and with Willis.

Quigley, who is also vice-chancellor of the University of Waikato, is currently pushing Willis and her Government for backing to build a long-sought medical school at Waikato. The plan requires at least $280 million of Government money, and possibly considerably more.

Reserve Bank chairman Neil Quigley is also vice-chancellor of the University of Waikato. Photo / Mark Mitchell

The Herald sought responses from Hawkesby and Quigley to the claims that each is conflicted in his ability to uphold RBNZ independence from Willis. Neither responded directly.

A spokesman for Willis said the Government respects the independence of the Reserve Bank and takes great care to ensure its actions support that independence: “The minister completely rejects any inference of political interference.”

“The Reserve Bank’s capital adequacy requirements have been the subject of ongoing questioning and criticism at the finance and expenditure select committee’s banking inquiry. The decision to respond to that questioning by reviewing the Reserve Bank’s capital requirements was made by the Reserve Bank, not the minister (although she has welcomed it),” he said.

The critics’ case

“Look, you’re the temporary guy and you want the permanent job. Remember the full position of governor would make Hawkesby a person on the world stage, that’s worth millions of dollars in a career. Is he going to stand up to Willis when she’s the one who’ll decide that appointment?” MacCulloch asked.

The Minister of Finance has final say in the hiring of a new governor. In addition, Hawkesby’s salary as governor has likely jumped by roughly $200,000. The RBNZ’s annual report last year put Orr’s remuneration at just over $800,000, while the next-highest-paid employee at the bank was paid just over $600,000. Hawkesby was previously a deputy governor at the bank.

The bank has not yet responded to a request to confirm Hawkesby’s remuneration.

MacCulloch noted that Quigley has been working toward the establishment of a new medical school at the University of Waikato for years, included authorising spending of over $1m on the services of the consultancy firm of former National Party minister Stephen Joyce (the result of a procurement process criticised by the Auditor-General).

MacCulloch and Reddell both suggested that if Willis wants to direct how banking regulations are set, her Government should change the law.

Reddell also noted that it would be preferable for politicians (answerable to the public) to set important policy direction in prudential matters, leaving enforcement to the RBNZ.

The Reserve Bank Act states that the bank’s board “must have regard” for the Government’s fiscal policy, but it is not understood as a coercive power.

Reddell said the circumstances in calling the current review “probably don’t breach the Cabinet Manual [which guides ministers identifying and managing conflicts of interest] but they’re undesirable ... It looks like the minister prevailed in an area where the bank has statutory independence”, he said.

Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at the University of Auckland.

Responding to questions put to Hawkesby and Quigley, an RBNZ spokeswoman emphasised that the decision to review the capital rules was precipitated by questions raised at the ongoing finance and expenditure select committee’s inquiry into banking competition.

“Many of our key stakeholder organisations, including all the major banks and the Commerce Commission [have] questioned the RBNZ’s approach to capital levels ... the RBNZ is a listening and learning organisation,” she said.

Quigley told the banking inquiry last month that he thinks “at least some” of the critics’ claims that the bank capital regime is too conservative are incorrect.

Nevertheless, the RBNZ is now proposing to engage independent, international experts to review the capital settings, a measure it also took in 2019 before settling the current rules.

The Opposition

Barbara Edmonds, Labour’s finance spokeswoman, said she’s concerned about “the timing of the Reserve Bank’s change in position, which closely followed the Governor’s departure, particularly given it was clear he didn’t support loosening the capital rules”.

“Even the appearance of political interference can undermine public trust in the RBNZ’s decisions,” she said, noting that the bank’s independence is “crucial for sound monetary policy, especially during a period of economic uncertainty”.

Economist and blogger Michael Reddell. Photo / Duncan Brown

What power sits with Government?

The Reserve Bank Act 2021 states that, in prudential policy-making, the RBNZ board “must have regard to” the Government’s fiscal policy.

Reddell said this language has long been understood as a requirement “to give serious consideration” to Government policy, but ultimately, he said, the decision maker should “employ their own best professional judgment”.

He said this was the legal advice provided to the bank’s Financial System Oversight Committee over the more than 15 years in which he was a member.

This tenure was before the current iteration of the Reserve Bank Act, but Reddell said he has compared the relevant language in both the current and previous acts, and he did not think there was a substantive difference.

Roger Partridge, chairman of the New Zealand Initiative and former head of Bell Gully, said he agreed that the act does not give the Government coercive powers over the RBNZ in prudential policy, but his view is that the bank may have something short of independence in the area.

“If the Minister of Finance says my Government is happy with the level of risk for our prudential regulatory settings, commensurate with international norms and does not want excessive risk aversion beyond international norms, put it this way, if that bank must have regard to that then I think it would be a bold move to ignore it and say we want something different,” he said.