Three economists put themselves in Adrian Orr's shoes

Friday, 6 December 2019

The Reserve Bank has made a big call about the price of bank safety.

The Reserve Bank on Thursday demanded the big four Australian-owned banks find about another $20 billion to put into their businesses to reduce the risk of them failing in a crisis.

ANZ, ASB, BNZ and Westpac will need to increase the amount of 'tier one' capital they hold to 16 per cent of their risk-weighted assets, as the Reserve Bank had proposed during consultations.

The Reserve Bank said that if average interest rates on loans went up 20 basis points by the time the rule change was fully implemented in 2027, that might mean a $5 increase in fortnightly payments on a $100,000, 30-year mortgage.

The Reserve Bank said in its report into bank capital that a stronger banking system would mean New Zealand would be better able to survive large shocks.

**READ MORE:

Reserve Bank governor Adrian Orr has raised capital requirements for large banks to 18 per cent by 2020, up from 10.5 per cent.

Jarrod Kerr, chief economist at Kiwibank says a Reserve Bank governor must remain vigilant and ready to act.

* Bank safety to be boosted - now brace for the impact

* Reserve Bank's '$20 billion' decision on bank capital may flow through to mortgage rates

* Reserve Bank capital plans could put handbrake on the economy**

Stuff asked three economists to look forward over the next year and tell us what they would do if they were in Reserve Bank governor Adrian Orr's shoes to ensure the changes made a real difference for New Zealanders.

Jarrod Kerr, chief economist, Kiwibank

What would I do if I was Adrian Orr? I'd take a break. He's had a big year.

I'd come back in 2020 with a fresh perspective. But before I left, I'd send another memo across the road saying: 'It's your turn now'.

Orr has set monetary policy at appropriate levels, for now. And he's set the financial system up for seven years of capital accumulation – all of which can be obtained by the major banks retaining some of their supernormal profits.

It's time for the Government to do its part now.

Strong and reliable fiscal expansion has been the missing piece in the economic expansion. And we have a shameful infrastructure deficit built up over decades of under-investment.

Economist Shamubeel Eaqub says banks need constant supervision to make sure they are following the rules.

The fiscal responsibility targets are irresponsible and meaningless. Time to put them to rest, so that we can invest.

The risks to the economic outlook has receded, for now. But a Reserve Bank governor must remain vigilant and ready to act. The flow of good news could easily turn south yet again.

We have a tendency to focus of the spot fires, rather than the burning bush in the distance. We focus on the immaterial United States-China phase one deal, but struggle to comprehend the raging populist-protectionist movement and decline in globalisation

We focus on Brexit and the United Kingdom's relationship with the European Union, but we struggle to comprehend the structural problems within the EU itself. The very existence of the EU will likely come into question in our lifetimes. Too many EU nations are getting ripped off, and only a few (Germany being the most obvious) are gaining.

So yeah, things look better. But I wouldn't bank on it staying that way.

Council of Trade Unions economist Bill Rosenberg says consumers effectively subsidise the big four Australian banks by the government bearing the risk of their failure.

Shamubeel Eaqub, economist, Eaqub & Eaqub

Now that the capital review is cemented in, I would turn my attention to making finance a force for economic good.

Financial liberalisation has not increased investment in the real economy, nor productivity.

If I were in the hot seat, my first priority would be to significantly increase the size and capability of the regulatory team. Banks need constant supervision and real risk of discovery of poor behaviour to make sure they follow the rules.

I would also give the Reserve Bank greater powers to take a holistic approach by asking for a financial stability agreement giving due consideration to the amount of debt in the economy (we have too much, and it is too much debt that makes an economy vulnerable to shocks). It's important to diversify its allocation too (the main reason we want debt is to invest in our economy, so we are more prosperous in the future).

I would impose debt to income limits for mortgages (because the ability to pay is linked to income); ringfence investment properties for lending purposes so that investors borrowed like a business (which it is); introduce deposit insurance to reduce risk to depositors and the crown; and incentivise banks to lend more to entrepreneurs.

Bill Rosenberg, economist, New Zealand Council of Trade Unions

The big four banks have an interest in exaggerating any negative impacts of the Reserve Bank's requirement to increase their capital

The four Australian banks' profit rates are among the world's highest. We effectively subsidise them by the government bearing the risk of their failure.

But record household debt at 164 per cent of disposable income, and gross international debt just over 100 per cent of GDP, far overshadow our (low) government debt. Two thirds of the gross international debt, $5 out of every $6, is owed by banks.

Meanwhile house prices rocket far beyond what many families can afford as investors bid the prices up, chasing untaxed capital gains. Many farmers farm for capital gain. A significant minority could be bankrupted if dairy prices drop because of their huge borrowing against inflated land values.

The easiest money comes from capital gains on land. That means a permanently low-wage economy and increasingly unaffordable housing.

One way out of this damaging spiral is to reduce the attractiveness of unproductive investment and wind down debt leverage. Much more is needed but this step deserves our support. Bank's huge profits should absorb the costs of this adjustment. They owe it to us.