Week in Review
Why we should call the Australians’ bluff on bank capital
Australian banks have threatened to leave New Zealand and slice economic growth if the Reserve Bank forces them to retain more of their dividends here to make the banking system safer for both shareholders and taxpayers. Bernard Hickey argues Jacinda Ardern and Grant Robertson should back Adrian Orr and call their bluff.
When Bill English and Annette King agree on something, it's worth sitting up and taking notice, especially if you're King's protégé and English's successor as Prime Minister. Jacinda Ardern knows better than most that these political war horses have fought each other long and hard, but they should be listened to when they agree about something important: exercising sovereignty in a way that could protect - or wreck - the economy and our society for decades to come.
Both English and King have spoken with a wizened authority and pungency in recent weeks about how New Zealand should treat Australian banks who casually threaten to take their capital out of New Zealand or increase the cost of banking: call their bluff.
As a bankbencher during the collapse and rescue of BNZ, and then as Finance Minister (in 1999 and then 2008-2016) and Prime Minister (2016-17), English watched Australian bank CEOs come and go during good times and bad. He signed Government guarantees for them when they needed them in late 2008, agreed to the Reserve Bank helping them out with $7 billion of loans in 2009, listened to their empty threats to starve farmers of loans in 2010 when capital requirements were hiked for rural debt, and saw them spend millions on tax lawyers over many years to reduce their tax bills. He has seen them demanding more autonomy to offshore their systems and knows they not-so-secretly would prefer to be regulated from Melbourne and Sydney, rather than Wellington.
"That threat to withdraw capital is, to a large extent, bluff. Australian shareholders and Australian banks do very well out of New Zealand. They generate good returns. I think they will stick around," the former National Finance Minister and Prime Minister told stockbrokers in Sydney in May.
"You make a choice – you either put up with a system and put your capital at risk, or you take it away. So far, for all the bluster over the last 15 years, no Australian bank has taken its capital away. What does that tell me? What should it tell you? Don’t believe what they say – watch what they do," said English.
'The bodies are over there'
King has seen the Australian banks bully and bluster and dodge and weave for even longer. As a backbencher from 1984 and a Minister in 1989-90 in the third Labour Government, and then a minister in the fourth from 1999 to 2008, she saw all sorts of big bank shenanigans. That included the mortgage wars of 2003 to 2007 that pumped up the housing market, and an aborted attempt via her cabinet colleague Finance Minister Michael Cullen and Australian Treasurer Peter Costello hand over New Zealand bank regulation to Australia's APRA. Luckily for New Zealand, the Reserve Bank and others staged a successful rearguard action to keep regulation here. She was also there beside Helen Clark when then-Australian Labor Prime Minister Kevin Rudd effectively forced New Zealand to provide a government guarantee for retail bank deposits when he did the same for their parents in mid-October 2008.
English said in Sydney in May he opposed the Australian bank preference for Australian regulators alone. He then cut to the heart of the issue.
“That means you can make decisions that could wipe out our sovereign balance sheet. We are not going to have that, and never will – that is never going to happen," he said.
Both King and English know where the bodies are buried and are deeply cynical of the Australian banks' pleading and bullying. King is also one of Ardern's closest advisers. She traveled with the novice Opposition leader throughout the country on the campaign trail in September 2017, and was there with Ardern in Melbourne last week when the Prime Minister was asked by reporters about pressure from Australia bank shareholders not to increase the capital requirements.
Ardern first referred to English's comments, but got the direct quote slightly wrong when she referred to the former National Prime Minister as saying the banks were "scaremongering."
“Call their bluff,” came the half-correction, half-chirp from King at the back of the room.
Happily for New Zealand, our politicians are often apolitical when it comes to core issues of sovereignty such as defence, trade and migration. And in a globalised world of capital flows, multi-lateral trade deals and investment, one of the last and increasingly potent arms of sovereignty is bank regulation, especially for New Zealand. That's because nearly 90 percent of our banking system is controlled by four Australian-owned banks, but their New Zealand arms have to operate under New Zealand laws and a New Zealand regulator in the Reserve Bank.
Some rare Trans-Tasman power
It is one of the few sources of leverage New Zealand has in its relationship with Australia, which is itself not shy of flexing its sovereignty muscles on prisoner repatriation and restricting the full benefits of residency to New Zealanders living in Australia. And we've learned in recent weeks the Australians don't like it when the shoe is on the other foot, especially after the Reserve Bank proposed increasing the amount of equity capital they have in New Zealand by up to $20 billion over five years, which would work out at about 70 percent of their profits, if they chose to retain their dividends to inject that capital instead of paying it back to shareholders in Australia.
The CEO of ANZ Group, Shayne Elliott (who is ironically a New Zealander) threatened in his submission to the Reserve Bank to pull some of ANZ's capital out of New Zealand, or even look after Kiwi corporate customers from Australia. He said Australian shareholders would not accept lower returns on equity implied by the Reserve Bank's assumption of higher dividend retentions. Instead, ANZ would increase its borrowing rates and lower term deposit rates to improve its profit margins to offset the extra $8 billion of equity they would expect to have to retain.
ANZ New Zealand Chairman and former Prime Minister Sir John Key is the exception to the bipartisan view on Australian banks. He warned in his submission the capital requirement increase could permanently reduce GDP by one percentage point in the long run, which had an effective present value of 20 percent of GDP.
Gold plated and 'radical'?
But ANZ is not alone in criticising the proposal, and not all the critics are Australian. The New Zealand Bankers' Association, which has 13 members who aren't the big four of ANZ, ASB, BNZ and Westpac, estimated in its submission there would be a $1.8 billion net economic loss if the capital increase was adopted. Federated Farmers also warned farmers and small businesses would be hardest hit when the banks tightened lending to the riskiest lenders. Dairy Holdings, which is Fonterra's largest supplier with 50,000 cows on 75 farms in the South Island, warned of the risk of a perfect storm where land prices collapsed after banks hikes mortgage rates by 100 basis points at the same time as a milk price slump.
The banks and other critics have argued the Reserve Bank is being too cautious by requiring an increase in equity capital for the big four banks from around 12 percent currently to 16 percent so that New Zealand's banking system can handle a one in 200 year crisis. They've submitted with their own analysis that this would put New Zealand's capital requirements significantly above international norms in a way that would cost customers, shareholders and the economy.
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