Unelected officials with little experience should not be able to make decisions that cost New Zealand taxpayers and bank customers $10 to $14 billion a year.
Absence of accountability creates institutions that regard themselves as above the law.
They do not listen, have deeply ingrained institutional biases and become highly resistant to change. In the RBNZ’s case, it typically takes an IMF report on New Zealand to force them to change.
We still wouldn’t have deposit insurance or any on-site supervision of banks if it were not for the 2017 IMF report. Even then, change is glacial. In 2003, the IMF pointed to weaknesses in the supervision of finance companies. By the time the GFC came around in 2008, the RBNZ still hadn’t done anything. That cost retail investors $3 billion. No accountability. We can’t vote out regulators who make regulation.
It is a good thing that there is political interference in prudential regulation. In fact, more correctly, the Herald headlines should be politicians have “assumed responsibility” for prudential regulation, which is something for which they must be accountable. It is elected politicians who should trade off a multibillion-dollar a year cost for a 1 in 200-year insurance policy for bank failure against, for example, funding the construction of regional hospitals.
It is the core job of any Minister of Finance to make rationing decisions not just of direct costs, but also indirect costs.
The RBNZ has proved to be chronically bad at understanding the size of the trade-offs, let alone reflecting them in its decision making. Again, no accountability.
Given the risk of defensive advice and ingrained biases in the case of bank capital, it is wrong to criticise ministers such as the Minister for Regulation for not taking his official’s advice, especially when virtually all expert analysis comes to different conclusions. Ministers must challenge advice if officials are to be accountable. That is how democracy and the rule of law work.
It is also wrong to criticise the Minister of Finance for creating a “permissive environment” to loosen bank capital rules designed to protect customers – as opposed to right-size them to reduce the burden on customers, which is what she is doing.
Moreover, the “environment” was first created by the previous Labour government, when it asked the Commerce Commission to study the personal banking market. One of the Commerce Commission’s recommendations related to the impact on competition of the capital rules. The “environment” has been continued by the Banking Inquiry, which has turned out to have provided a useful learning process for us all.
The Banking Inquiry was a policy position of New Zealand First, not the Minister of Finance.
To be clear, it is in fact appropriate for the Minister of Finance to interfere.
There are specific provisions in the Reserve Bank of New Zealand Act 2021 that enable the Minister of Finance to interfere by issuing a Financial Policy Remit – even if that remit only requires the RBNZ to have regard to it. As far as we are aware, that is all the Minister of Finance has endeavoured to do – ask the RBNZ to reconsider its decision. Indeed, the previous Minister of Finance did exactly the same thing by issuing a Financial Policy Remit designed to advance the political goals of his government in relation to things such as climate change.
If anything, the Minister of Finance, Nicola Willis, could have been criticised for not going far enough in assuming responsibility for prudential regulation and reducing the $10 to $14 billion a year cost of regulatory overreach in banking. Our prudential regime is unorthodox and significantly out of step with international practice – and, in particular, Bank for International Settlements standards.
As we have said in our submissions to the Banking Inquiry, New Zealand should consider removing prudential regulation from the RBNZ and do it in the same way as all other regulation, with the RBNZ simply acting as no more than a policy adviser.
We hope that this might still happen when the Finance and Expenditure Committee issues its report following the conclusion of the Banking Inquiry.
As taxpayers, citizens and customers, Nicola Willis, please interfere.
- Andrew Body is a company director, active investor and investment banker. He has an MCom in economics and an LLB from the University of Auckland.
- Simon Jensen is a legal consultant with a BCom in accounting and an LLB from the University of Auckland. He is expressing his personal opinions only in this article.
