Banking supervision hot transtasman topic

David Morgan says Australian banks are not out of line by challenging Reserve Bank draft policy. Picture / Mark Mitchell

It's been the hot topic of the debate over a single transtasman economic market: banking supervision. It's also a red herring, says Westpac chief executive David Morgan, one of the high-powered group at this weekend's Australia New Zealand Leadership Forum in Melbourne.

Morgan, a former senior deputy secretary to the Australian Treasury, denies Australian banks are simply out to feather their nests by exploiting proposals for a single market to strip out costs from New Zealand offshoots.

"One of the reasons why I am pretty passionate about this subject is I will not argue for shabby public policy," says Morgan. 

After Finance Minister Michael Cullen and Australian Treasurer Peter Costello made banking supervision a key agenda item in their quest to bring the economies closer, it quickly became a litmus test for national sovereignty feelings.

Some New Zealand businesses - particularly those associated with Wellington businessman Lloyd Morrison's nationalistic campaign to stop Qantas from merging operations with Air New Zealand - are again in action.

Morgan is concerned New Zealanders, whipped along by media reports, are getting exercised over a proposal that all Australasian banks should be monitored by a single Australian-based regulator when, in fact, the policy debate has already moved on.

The Reserve Bank's draft policy on bank out-sourcing is another issue. The central bank wants to ensure New Zealand offshoots of Australian banks act on a standalone basis with enough assets and capital here to withstand a financial crisis or to ride out volatility if Australia suffers an external shock.

With 98 per cent of New Zealand s banking system owned from offshore - 85 per cent by Australian banks - the Reserve Bank has clear incentives to ensure the risks associated with outsourcing critical bank functions are managed prudently.

The Westpac chief emphasises Australian banks are not out of line by challenging the draft policy. The banks estimate it could cost up to $300 million in lost efficiency gains if the policy is implemented. It would make them less efficient and less competitive.

Morgan says: "It's a large and needless efficiency cost ... It's going to be the subsidiary getting into trouble, not the parent."

Westpac has been on a whirlwind of lobbying to try to deepen what it regards as a shallow media debate on trantasman banking issues.

Local chief executive Ann Sherry has written to MPs urging them to get across the issue.

Morgan urged Westpac's top 10 New Zealand clients at a private Wellington lunch to show leadership on the push for a single economic market and to use this weekend's forum to make some real progress.

In prepared speech notes, he said: "Media might gain sales from hawking ideas consistent with a New Zealand banking sector fenced off from Australia and the world - but what would New Zealand gain?

"It should not be the only focus - and it certainly should not be a focus based on an alarmist and emotive drive to seal off New Zealand's banking system from what are held to be distant and uncaring Australian regulators, rapacious Australian banks and the consequences of a financial collapse - however remote that possibility is."

It has been an annus horribilis for Australian banks, which are a ready target for the likes of anti-foreign ownership group Cafca and news media.

"Mega profits, tax dodging, hidden fees, outsourcing of key functions to Australia using NZ's cheap labour for the donkey work - it's a pretty impressive rap sheet." said Cafca.

Along The Terrace - home of the Reserve Bank's prudential supervisory team - regulators grapple with a banking sector with all its eggs from one basket: Australia.

It was the Reserve Bank that put the skids under the Australian banks' tax avoidance schemes by releasing documents to expose they were paying a pittance compared with average corporate rates.

Some Westpac clients at the Morgan lunch - such as Wrightson deputy-chairman Craig Norgate - believe the single market process is too important to New Zealand to founder over banking policies.

Norgate - like Morgan - also believes there has not been sufficient public attention to an offer by the Australian Government that New Zealand depositors could have preferential treatment - sharing the status already enjoyed by Australian depositors - if a major transtasman bank failure occurs.

Morgan disputes claims New Zealand's tax net will be impaired under a common prudential regime. He has high expectations that this weekend's leadership forum of 80 politicians, business leaders, bureaucrats and academics will move the single market agenda along.

 

Sherry is representing Westpac in Melbourne. Players such as ANZ National chairman Roderick Deane (a former Reserve Bank deputy-governor), ANZ Banking Group chief operating officer Bob Edgar and Bank of New Zealand chairman Kerry McDonald, are present. Also: Reserve Bank Governor Alan Bollard, Treasury secretary John Whitehead and Australian Treasury senior official Jim Murphy. Costello is present to champion his single-market baby.

But whether common ground can be achieved when one key player - Cullen - is absent is another matter.

It is clear that the senior banking fraternity now see an opportunity to make a skilful compromise on key issues. McDonald - who co-chairs the forum - said he was optimistic over banking.

Last year, forum participants emphasised they wanted two sovereign nations united by a common system - "so the policy harmonisation process has to recognise that and I am sure the banking regulation at the end of the day will recognise that".

"A lot of media stuff suggests the regulators are standing back throwing stones at each other and not co-operating. The reality is quite different. There is a substantial degree of collaboration.

"I would say the astute view of the Australian banking industry is they are seeing this as an opportunity to find common ground. But New Zealand banking regulations are relatively light-handed because to some extent it piggybacks on APRA (Australian Prudential Regulation Authority).

"And I've not seen that reflected in articles."

The game has moved on since the suggestion by Australian Treasury officials that transtasman banking supervision could be brought under the umbrella of the Australian Prudential Regulation Authority threw local officials into a spin.

Morgan says: "I do not want to take the APRA prudential regime and put it over New Zealand. In principle, I think the foundations of the prudential regime at the Reserve Bank are, in some respects, superior to the foundations of the approach in Australia.

"I fundamentally support a disclosure-based light touch regime - I want to take the best of both and improve regimes in both countries.

"I think we could still have separate regulators - if we wanted those. But the important thing is that policy gets harmonised consistent with the way other policy is harmonising around the world."