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Q+A: Reserve Bank Governor Adrian Orr

Reserve Bank Chief: No need for banking inquiry in NZ

The new head of the Reserve Bank does not think New Zealand’s banks conduct themselves as badly as their Australian counterparts and he does not think institutions here need to be investigated.

Adrian Orr, who took up the role of Reserve Bank Governor last month, told Corin Dann on TVNZ 1’s Q+A programme Australian banking was “not a happy situation”.

In Australia, a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services is currently looking into whether firms have engaged in misconduct.

The hearings began last month and have resulted in startling admissions of bad behaviour by banks and other financial companies.

“The true problem and challenge that is going on in Australia is cultural. It’s not whether the regulator was awake or asleep. It’s cultural,” Mr Orr said.

He said New Zealand’s banks were “infinitely better than some of the activity you’ve seen in Australia” and he did not think such an inquiry here was needed.

“I don’t see any lack of confidence in banks in New Zealand. They are highly capitalised. They are highly efficient,” Mr Orr said.

When asked whether New Zealand needed a capital gains tax he said: “I think that we need to have a more efficient, level playing field around tax.”

END

Q + A
Episode 6
ADRIAN ORR
Interviewed by CORIN DANN

ADRIAN Personally, I think we have a very unusual tax situation, and it reflects back into the banking sector. When you see, you know, 90% of household wealth or net worth being equity in a home, and leverage — you know, 80% of the loans in banks are to housing — and then you see relative prices of housing where they are, then you are saying, 'Hey, this is a real issue, part of which sits in the reserve bank around the concentration of risk...

CORIN Sure.

ADRIAN '...and the potential unravelling, you know, if things happen.' So we've got absolute legitimacy to be talking about what it is, why we see it as a concern, what we are doing about it with our toolset, but also putting sunlight on other areas.

CORIN So, would you submit to the Tax Working Group that we should have a capital gains tax?

ADRIAN I will have to see what they are offering. If we are asked, we will provide advice.

CORIN But do you personally have a view on it?

ADRIAN Around capital gains tax? Yeah, I do. I think that we need to have a more efficient, level playing field around tax.

CORIN We'll take that as a yes. Let's move to interest rates. Inflation this week was weak at 1.1%, near the bottom of your range. I'm wondering whether you're thinking there should be a cut in interest rates coming.

ADRIAN Yeah, so— I'm smiling away, because the new PTA has been—

CORIN The agreement with you and the government.

ADRIAN Yeah, between myself and, you know— Basically, my raison d'etre when it comes to shifting interest rates. And we've tried to make it actually simpler in what we're aiming for. And we're aiming for the midpoint of two, and there's a range around 1% to 3%. And what is that range? It just says, 'Look, we're always aiming for two. On average, we hope to be somewhere between one and three.' So that is not a hard band or anything. When we are forward-looking, and you will always see in the economic projections we put out, inflation is heading back towards two. And so what we're trying to do is say, 'Given the lags between what we do and the end outcome for inflation, we're always aiming at 2%.' And that is still the case with the current setting, as per the last monetary policy statement. We haven't started the work this time around. I'm looking forward to that. That's coming in the next couple of weeks to say, 'All right. Refresh the forecasts.' But the real point is that we're aiming at 2%. The fact it's at 1.1%, you think, 'That's great. It's low. It's stable.'

CORIN Is there a worry there that we've got a lot of people on fixed one, two, three-year rates that when they roll off, they're going to get whacked with quite a big, higher rate?

ADRIAN I think that is a concern for people. They always have to understand what drives their interest rate, and that is a component of deciding whether to be floating or fixed, and, really, it comes down to your personal position. So, rather than your ability to forecast where the rates are going, you know, when you're thinking about, 'Do I fix? Do I float?' Really, it's thinking about, 'What is my certainty? What are my liquidity needs? What's the horizon over which I can manage this particular payment?'

CORIN Have you been watching the Australian Royal Commission and some of the alarming stuff that is coming out of there of those Australian banks, which are the parent banks of our banks? We're talking lying to regulators, deceiving people, over-charging people. We've got the AMP chief executive in Australia.

ADRIAN It's just not a happy situation, is it?

CORIN Is it not unreasonable for New Zealanders to go, 'Heck, is that going on here?'

ADRIAN Well, I think that is exactly the types of questions we should ask of any business, any company. You know, what is the moral compass of the leaders, the board, the purpose of that institution? And so the answer — yes, we are watching. Yes, it is a real concern. Every day, you know, two-thirds of the day for a bank in Australia now is explaining why they're not guilty. And that is just such a terrible position to be in. Which is why we've been arguing so hard, and we will continue to market discipline — you know, the ability to be transparent and to allow people to see what you're doing; self-discipline — around the boards, our testing, working hard and signing off on issues, which really come down to the moral fibre of the institution — are critical, because that is sunlight coming in and, hopefully, disinfect it. So that is critical. Banks will always argue and be upset because we are asking; we are intruding. You know, 'How did you get comfortable with that? Show us how you signed off on that.' Do that type of activity. You know, that is the regulatory discipline.
CORIN Well, I wonder — just to interrupt you — whether, in fact, that's the case. Because the IMF report out last year suggested that the reserve bank had been too lax in its monitoring of the banks. And Kerry McDonald — you'll be familiar with him. Former BNZ chairman.

ADRIAN Yeah, he wrote a very passionate letter.

CORIN He wrote a stinging letter, in which he suggests that the Reserve Bank is naive; it's weak in its approach, ineffective, and leaves New Zealand bank customers seriously exposed.

ADRIAN What was he really thinking?

CORIN Exactly. I mean, there's more. Do you want me to read some more?

ADRIAN No, no, I've read the letter. I've seen the movie. I know Kerry well. And we have to take that type of stuff seriously.

CORIN You're coming in fresh. Do you think there needs to be a sterner look at what's going on in the banking sector and a sterner look at your own bank here to make sure that they are doing it right?

ADRIAN Number one task — our bank here, for me. Are we doing the task effectively? That is a critical question. Last week, by the way, if we carry on the criticism that was the New Zealand initiative, they put out a report also with all those same types of claims. I'll just say a couple of things as quickly as we can. The first thing is, the IMF did not say we are ineffective. They said you are best practice, fit for purpose, but you don't have enough capacity — ie, enough boots on the ground. That message was taken in many different ways wrongly. So, I will refer people back to the IMF report, and the Minister of Finance knows himself. The second part — with that IMF, we have actively in New Zealand, as regulators, chosen not to do certain types of activities, because a) they're already being done to the banks elsewhere—

CORIN By who? Because, I mean, Kerry McDonald says auditing, testing... You're not going in there, and you're trusting them to tick the boxes themselves.

ADRIAN Huge amounts are already done by the APRA regulator for the large banks. We then do it ourselves. By the way, that is a single person's opinion. You can also go and get other opinions—

CORIN Hang on. When you say 'APRA', who is that?

ADRIAN Oh, sorry, that's the Australian Prudential Regulatory Authority.

CORIN But we can hardly trust them, because look at what happened in Australia.
ADRIAN Aren't they the ones who are doing the commissions? Aren't they the ones who are working on this type of stuff at the moment? Aren't they the ones who Kerry McDonald is referring to, for example, as best practice? So why do you say that? You either believe what Kerry is saying, and we have APRA, or you don't.

CORIN Well, to be fair, he is saying— Yeah, sure.

ADRIAN So what we're saying is, we need to have a regulatory framework that is fit for purpose for New Zealand. The true problem and challenge that is going on in Australia is cultural.

CORIN Yes.

ADRIAN It's not whether the regulator was awake or asleep. It's cultural. You cannot save a fool from—

CORIN And what do you think of the culture of the banks in New Zealand?

ADRIAN I think it is infinitely better than some of the activity you've seen in Australia.

CORIN Does it need an inquiry or some sort of an investigation to reassure New Zealanders that some of the—? And we're talking financial service products, really, in Australia.

ADRIAN My view is no.

CORIN We don't need an inquiry?

ADRIAN No. I would say no, because the financial markets authority are all day, every day, thinking harder around the consumer-investor behaviour. We've got ourselves around the prudential regulatory behaviours. We've got the Ministry of Business, Ministry for the Environment, talking about consumer protection. You know, these things are happening daily. Why, suddenly, stopping everything and having a royal commission in search of a problem not yet to be identified? It just doesn't make sense.

CORIN It's confidence, though, isn't it? Confidence that...

ADRIAN I don't see any lack of confidence in banks in New Zealand. They are highly capitalised. They are highly efficient.

CORIN We're only just starting to see trickle out of Australia, you know, chief executives of a big brand like AMP — admittedly, the Australian parent — going. That starts to rock people.

ADRIAN I think it should always keep people aware, and that is why we have always leaned very heavily on that transparency, market discipline, self-discipline. What happens if it's just us — regulatory discipline? Well, then blameship just comes on to the regulator. 'Oh, you didn't see that. Why didn't you do that?' And that will never happen. We'll only be the ambulance at the bottom of the cliff. Unless you get the attitude and alignment with the board, with the management, investors, consumers, competitors can all watch, observe and, you know, whistle blow — that is how it really works. The centre structures have to be aligned.

CORIN Taking it to the future a little bit, I wonder if— We've seen the banking sector come back to a request from the government about open banking and the idea that we could see some third parties come in, effectively wholesale the bank's data. You know, apps. Call it an Uber-isation of banking. Maybe that's long-overdue.

ADRIAN I would say that, you know, banking is the second-oldest business in the world, and it's made very, very high rates of return on capital forever. And, yes, like many industries, banking will be disrupted in some way. Insurance has been absolutely disrupted, both through how they operate themselves, and also the products. So, you know, people are going to have to embrace the technology of the future. Doing the same thing today is not going to be profitable in the future. The open banking, you know, the mere nature that— I used to challenge this when I was working in the bank, saying, 'Hey, why can't I just take my bank account number and take it and put it in a different bank, as opposed to having to rewind and start again?' When I left, I took my own phone number with me. Why can't I do that with my banking account? And so these types of things are always going to be challenged. There is nothing unique or nature-specific as to why banks are what they are today.

CORIN And will we still have cash?

ADRIAN Yes, yes. I mean, I find the cash side amazing. You know, the death of cash has been forecast now for a long, long while — greatly exaggerated. There will be less of it; probably smaller denominations. I'm talking globally. But there is always a need.




Please find attached the full transcript and the link to the interview

Q+A, 9-10am Sundays on TVNZ 1 and one hour later on TVNZ 1 + 1.
Repeated Sunday evening at around 11:35pm. Streamed live at www.tvnz.co.nz
Thanks to the support from NZ On Air.
Q+A is also on Facebook + Twitter + YouTube

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