Portrait of the governor as a strongman: the complicated heroics of Adrian Orr

Friday, 4 October 2019

Adrian Orr's leadership style at the Reserve Bank is under fire from an economics professor who says the governor's desire to court celebrity status by shocking the markets will damage confidence in the economy.

ANALYSIS: Reserve Bank governor Adrian Orr's efforts to stand-up to the country's banks have confirmed him for many as a national champion.

New Zealand's big banks, all of them Australian-owned, make easy villains.

Their profit on New Zealand business is notoriously high and a parade of mistakes has dogged them in recent years, including failures by both Westpac and ANZ to properly calculate the amount of capital they are required to keep on hand.

But that simplistic characterisation of 'the good men' at the Reserve Bank (as one submission on the proposed changes put it) tackling the rapacious bankers has taken a turn. Even good men can be complicated characters, and sometimes they do high-handed things.

When he landed the top job at the Reserve Bank 18 months ago he was hailed as a strong general. But Orr is now mired in a fight with the country's big banks and the cut and thrust has left mounting collateral damage.

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A blog post by little-known academic, Martien Lubberink, Are the Reserve Bank capital plans really about conduct risk? on May 17 caught Orr's attention.

Soon after writing the post, Lubberink, a bank capital specialist at Victoria University in Wellington, received an emailed letter from Orr, disputing parts of the post, line by line.

It was an awkward thing for Lubberink, who had also made submissions to the Reserve Bank on its review of commercial bank capital rules, both on his own account and by contributing to work for the New Zealand Bankers' Association. But more awkward still were the emails that followed.

The first came from the surprised head of Infinz (the professional body for those working in and around financial markets). He and another colleague had been sent a copy of the letter.

The next was from Orr's executive assistant saying that Orr was also happy to share his letter with the co-authors who worked with the Lubberink on the recent submission.

Lubberink took the suggestion as a threat.

'He's in danger of bringing scorn on his office,' says long-time industry watcher David Tripe, professor of banking at Massey University.

It was a mark of just how personal New Zealand's top technocrat was willing to be in dealing with critics of his signature effort to strengthen commercial bank stability (Orr declined to be interviewed for this story).

Submissions from the real world, outside the rarefied air of number 2 The Terrace, Wellington, landed on his desk in May. And while they were mixed to be sure, much industry and academic opinion was quietly damning.

A lot of it suggested a hefty price tag for the Reserve Bank's proposed changes for the New Zealand economy broadly and, for borrowers and savers particularly. It's a cost the Reserve Bank has, as yet, demurred to thoroughly estimate or make public.

In the cut and thrust of the debate, Orr's jokey style and everyman charisma fell away. In recent months he's dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He's been variously described as defensive, bullying, and perilously close to abusing his power.

'He's in danger of bringing scorn on his office,' said long-time industry watcher David Tripe, professor of banking at Massey University. 'I used to know him well. I no longer feel so confident.'

Reserve Bank governor Adrian Orr is taking a strong stance against Aussie banks.

A very big number

When Orr joined the Reserve Bank in March last year the push was already underway to make banks hold larger capital reserves.

The proposed changes began to take shape in 2016 and 2017. However, former insiders say the previous governor Graeme Wheeler was never sold on their wisdom. Orr, on the other hand, was quickly persuaded.

By last November, he was already at pains to paint the effort as a defence of the New Zealand public. He said as much in a speech to the Business New Zealand CEO forum.

'We are sharing our work with the banking sector and the public, and expect to hear one side of the story loud and clear, that capital costs banks.'

His focus, he emphasised, was on getting a 'broader perspective than that, to best reflect New Zealand's appetite for risk.'

In December, the bank finally tabled its full capital plan and called for interested parties to make submissions. It proposed to increase large banks' total minimum capital requirements from the current 10.5 per cent to 18 per cent. For not 'systemically important' banks the number was 17 per cent.

Financial Markets Authority chief executive Rob Everett and Reserve Bank governor Adrian Orr deliver the findings of their joint review into the conduct and culture of banks in New Zealand. First published in 2018.

Most of the increase would need to be raised in the form of common equity, and the central bank says the four major banks might need to raise a whopping $20 billion of new capital (or retain as much in profits over time).

The Reserve Bank said the cost to the New Zealand economy would be 'minimal'. Though its figures also suggested it would increase bank lending margins (the difference between bank lending and borrowing rates) by 0.2 per cent and 0.4 per cent, suggesting higher loan costs or lower interest for bank customers.

The reason was to safeguard New Zealanders against the cost of bailing-out banks in the event of a crisis. Increased capital from bank shareholders, would absorb bank losses in the event of mounting defaults, diminishing the risk that bank depositors would stand to lose money and pressure the government to fund a rescue.

A capital buffer of 18 per cent of risk-weighted lending, the Reserve Bank argued, would limit destabilising financial shocks, such as were likely to harm depositors, to one-in-200 years.

Orr's emphasis on banking stability has plenty of support.

'The banks have gotten away with too much and he's the right man for the job,' said Sam Stubbs who competed against Orr for his earlier job heading New Zealand's Super Fund, lost out to Orr, and still counts himself a big fan of the governor despite (and indeed because of) the challenge Orr's laid down to the banks.

Independent economist Cameron Bagrie is also satisfied that Orr's moving in the right direction.

'I think Adrian has more of a social conscience than previous heads of the Reserve Bank,' he said.

But while he agrees with the 'spirit' of the bank's efforts, he's 'not convinced they have the right number'.

Civility slips

'The banks have gotten away with too much and he's the right man for the job,' Sam Stubbs says.

Among the first to openly question the cost of all that capital to the New Zealand economy was business journalist Jenny Ruth.

On January 10 she received a letter from Orr, critiquing a story she had written about banking capital, line by line.

He tackled more than half a dozen points, some of which added context to Ruth's assertions, some hoped to correct them. But Orr's points themselves were sometimes partial.

He claimed, for example, that the proposed Reserve Bank capital changes would be cheap enough that they wouldn't alter New Zealand company borrowing patterns and add risk by pushing borrowers to seek out riskier non-bank lenders.

'Given reasonable estimates of any increase in bank lending spreads (about 25 basis points) it is hard to envision any dramatic change,' Orr wrote.

That estimate, however, is uncertain. While two of three international experts commissioned by the Reserve Bank to review its process recently suggested it may be low, a third said it is not clear what the cost of the proposed new capital rules will be and cited particularly the possibility of non-bank lenders filling credit gaps.

Doubt remains in other quarters too. Glenn Boyle, a financial economist and adjunct professor at the University of Canterbury said, 'the Reserve Bank has done very little to calculate any costs, except to say cost would be minimal'.

Adrian Orr's emphasis on banking stability has plenty of support.

Boyle, who reviewed the Reserve Bank's December proposal and supporting literature and contributed to a report commissioned by the New Zealand Bankers' Association, maintained that a full cost benefit analysis should have been done at the outset. Instead, the Reserve Bank has promised to produce one later this year.

Criticism of the Reserve Bank's capital proposal strengthened after written submissions hit Orr's desk in May, and some, particularly those made by the big banks, centred on costs.

The media stories that followed were full of warnings: the proposal could add $6000 a year to the cost of carrying an Auckland mortgage; riskier lending, like farm loans and those to small business, could become more scarce and expensive; farm land would depreciate; and savers would earn even less on their deposits.

ANZ, the country's biggest bank, suggested it might limit lending in New Zealand altogether.

Some, like Stubbs, called it fearmongering. Others, like Tripe, said the costs could easily be higher than Orr and the supportive international experts maintain, and they need a proper airing.

Orr was incensed at the mounting opposition. At a late May press conference he mocked the Bankers' Association for suggesting the public should pay for bank failures.

He styled their contention this way. 'If the banks fail it's our (the Reserve Bank's) fault and we should pay them out anyway.'

It was a very one-eyed reading of the association's submission which indicated only that, in the event of a crisis, bank depositors would have 'a right to argue' the government should pay the cost.

That press conference brought Orr's civility to a low ebb. He took Ruth to task again, for another news story, this one covered ANZ's use of an unapproved risk model for calculating required capital. It was clear the bank had already been in touch with Ruth about the story, but remained unsatisfied.

There is 'so much misperception, in fact by one journalist in here around what did or didn't happen,' Orr fumed. He went on later to abruptly cut off Ruth's questions, telling her, 'you've asked many questions along the path and we have some issues to clear up with you about factual mistakes'.

The video of the conference remains on the Reserve Bank's website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink's experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank's plan.

'There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,' said one source who's been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn't agree with.

'I'm worried about what he's doing.'

Orr is a long way from the broad respect he enjoyed in early 2018 when he stepped down from his successful stint leading the Super Fund.

The source said some companies have 'withheld submissions,' for fear of being targeted by Orr.

'They're absolutely scared of repercussions. It's genuinely disturbing,' he said.

Time for a decision

It's a long way from the broad respect Orr enjoyed in early 2018 when he stepped down from his successful stint leading the Super Fund to take the reins at the Reserve Bank.

Now a polarising figure, he will draw the messy capital review to a close by the end of the year, deciding whether to commit to his seemingly entrenched position or amend it.

There are plenty of wild cards that could swing the outcome at the last minute.

For one, the Australian regulator has limited the amount of capital subsidiaries of Australian banks can keep overseas And there is also the prospect of deposit insurance, recently promised by the New Zealand Government. It remains unclear whether it will affect the Reserve Bank's push for more stability through increased capital.

Orr is also determined that ordinary Kiwis should have their say. To that end the Reserve Bank has engaged a third party to hold 'three deliberative workshops' with the public, spokeswoman Serene Ambler said.

A common touch for a man who's starting to look heavy-handed.