New Zealand's banking sector inching close to warfare

Tuesday, 4 June 2019

OPINION: As extraordinary as it was for a top bank director to call for former prime minister Sir John Key to be removed from ANZ, it is just a symptom of how close to open warfare New Zealand's banking sector finds itself.

On Saturday Stuff revealed that Kerry McDonald, who was chairman of BNZ for more than a decade, had written to Reserve Bank governor Adrian Orr calling for a number of ANZ's board members and top staff to be removed.

It related to an incident which saw ANZ given a severe telling off by the Reserve Bank in mid-May, but for which no one appears to have been held accountable.

ANZ's board had been wrongly claiming that the way it calculated how much capital it needed to hold as a safety buffer complied with Reserve Bank rules.

Adrian Orr was made Reserve Bank governor in part because of his strong communication skills. In the weeks after he began he promised to improve the way it consulted with stakeholders such as banks. But little over a year later, the central bank is locked in a fight with the banking sector over how much capital they should hold.

* Reserve Bank censures ANZ for 'persistent weakness in process'

* Reserve Bank plan 'has significant negative consequences for our country': banks

* ANZ breaches conditions of registration; no punishment from Reserve Bank**

In fact, a small part of the calculation had been turned off without the Reserve Bank's (or, it seems, ANZ New Zealand's) knowledge.

ANZ's response to the censure, while acknowledging disappointment, has appeared to diminish the significance.

It pointed out that the error meant ANZ was holding $23 million less than it should have been at the end of March, 'a very small proportion of the approximately $12.4 billion in total capital held' by the bank at the time.

The real error was more significant than the dollar figure. Although it seems unlikely that ANZ would jettison Key over it, it seems remarkable that no one has been held responsible or that the bank has not explained how the mistake happened.

ANZ New Zealand has acknowledged its Australian owners were making the calculation in question. 'A failure of systems and controls, as well as no verification being undertaken by the bank' meant a risk model was 'decommissioned' without a new model being approved.

It sounds almost as if someone in Melbourne threw away an old laptop and did not bother to let anyone in Auckland know.

In major organisations, mistakes happen.

Shortly after leaving politics, Sir John Key was named chairman of ANZ New Zealand. In May, former BNZ chairman Kerry McDonald called for Key to resign 'or be removed' after ANZ was censured by the Reserve Bank after an error was uncovered related to the way it calculated how much capital it needed to hold.

But the fact that ANZ did not have systems in place to ensure that the New Zealand board would find out about something that was core to their responsibility should be deeply embarrassing.

As McDonald wrote in his scathing letter to Orr, the boards of the New Zealand subsidiaries have a legal obligation to act in the interests of those subsidiaries, even where that might come into conflict with the owners.

'Given the information available it is likely that they were negligent in relation to this critical requirement, which is fundamental to the interests of the New Zealand banks customers,' McDonald opined in his letter to the Reserve Bank.

The ANZ issue is arguably a sideshow in a major struggle between the Reserve Bank and the banking industry over how big a capital buffer should be held.

In late 2018, the Reserve Bank revealed proposals which could see the New Zealand banking sector required to raise more than an additional $20b, in an attempt to position it to withstand a one-in-200-year crisis.

This was a far higher standard than expected, prompting a major push back from the industry that such a move would be costly, which appears to be unsettling the Reserve Bank.

A submission by the New Zealand Bankers Association (NZBA) warned the proposals 'significantly underestimated the negative consequences for our country', and that the move could amount to a 'handbrake' on the economy.

In simple terms, higher capital levels make banks less likely to fail but also more expensive to operate.

As well as potentially lowering profitability, the move could ultimately make it harder and more expensive to borrow.

Westpac ramped up consumer concerns with a warning that the move could add $6000 a year to the average Auckland mortgage, while ANZ has warned farmers that the move could add to rural borrowing costs.

Last week as he fronted a media conference, Orr accused the banks of using its proposed changes to hide behind as they made commercial decisions and dismissed questions that his move might precipitate a drop in farm prices.

After publicly chastising a journalist, Orr suggested that the NZBA's submission had claimed that 'if banks fail it should be our fault and we should pay them out anyway', something he believed was 'astounding'.

NZBA has denied suggesting that the government should ever bail out the banks, saying that instead an independent report merely speculated that in the event of a bank failure, a government would be reluctant to allow customers to take a haircut on their deposits.

Orr was brought into the role of Reserve Bank governor in large part because of his communication skills. In the weeks after he took up the role he promised to improve how the central bank consulted with the industry, in the face of stern criticism of how the bank operated.

Little over a year later, the industry's relationship has descended to something close to name-calling. Given how much banking impacts on New Zealand's economy, the stakes could hardly be higher.

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