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Banks accuse the Reserve Bank of trying to "scramble the cards" by forcing them to invest too much of their own funds. Bernard Hickey says the regulator is right in predicting a 200-year crisis and investors should accept slightly lower profitability.
It is understandable that the major Australian fund managers and the leaders of Australian banks smothered Nutrigrain last December when the Reserve Bank offered to give up $ 20 billion in dividends over the next five years, for no obvious reason or immediate – at least for them.
After all, they argued, the banking system was secure and stable and this "gold plating" of the system was useless, especially since the financial markets are relatively calm and our banks have much more capital and more stable funding than in the 2008 and 2009 Global Financial Crisis.
Trust us, they said. We are much safer than before and we are not like those bad banks abroad, they said. And believe us, they said, if you force us to hold more of the safest capital, it will cost us, not us.
The president of ANZ New Zealand, Sir John Key, told the Reserve Bank that GDP could be 20% lower in the very long run as banks should increase their interest margins to maintain their level of profitability. ANZ Group CEO Shayne Elliott said that ANZ shareholders could choose to withdraw their capital from New Zealand.
Westpac New Zealand suggested that higher capital requirements would raise interest margins by 100 basis points or 1 percentage point, which would increase the average cost of Auckland mortgages by $ 6,000 a year.
Farmers have pointed to increasingly high margins on the value of their land, stressing that banks would punish them more, as the dairy debt is considered by the Reserve Bank as the most risky. Dairy Holdings, which has 50,000 cows and is the largest supplier of Fonterra, warned of a perfect storm of rising mortgage costs and falling milk prices, likely to cause a collapse in the value of land.
In summary, the banks argued: Why do these Wellington-headed bureaucrats constitute such a mass of nerves and endanger the export economy in the regions and housing prices in Auckland's suburbs? ?
"Nitpickers Autarkic"
Some commentators were even more pointed. Geof Mortlock, a former Reserve Bank advisor, the Australian regulator of banks, the IMF, the World Bank, KPMG, banks and insurers, have written comment in the Australian Financial Review to an enthusiastic audience. He accused the Reserve Bank of "deliberately adopting an obsessively self-sufficient, nationalistic and overly defensive approach to banking regulation, supervision and regulation."
"It has actually sought to create a financial divide around New Zealand and has designed regulatory and resolution arrangements based on an unwarranted mistrust of how the Australian authorities would handle a financial crisis. about it, "said Mortlock.
He can say goodbye to any consulting work of the Reserve Bank so …
But are the banks right?
Behavioral economists sometimes speak of a tendency to put too much emphasis on the most up-to-date and available information when making decisions, rather than on the most relevant and useful information.
This is described as the "availability heuristic" or the "recency bias," in which decisions use the most easily accessible and up-to-date information to make a decision. The layman would describe it as saying that memories are sometimes brief. In terms of banking regulation, there is talk of "catastrophic myopia" under which policymakers tend to downplay the odds and effects of a low-probability but high-impact event, such as a collapse of bank.
The memories and the duration of attention are getting shorter at a time when most people are getting their "news" thanks to their Facebook news feeds and where the latest dramas about The Kardashians or The Block are at less known than what happened to Northern Rock, Bear Stearns, Lehman Brothers, AIG and South Canterbury Finance between 2008 and 2009. That was 11 years ago. Some bankers in management positions had not started their careers yet. All these leaders have seen a drop in interest rates and a very strong profitability of banks.
Most voters and clients of banks watching the financial markets and economies can now only know record stock markets, high real estate prices, extremely low mortgage default rates, record unemployment and prices. real estate that almost never fall. Paul Simon sang in his 1986 song "You Can Call Me Al" about his "little attention span", and it was before the Internet, Twitter and smart phones. Some bankers and their supporters have pointed out that there has never been a major bankruptcy in New Zealand. Why, then, has the Reserve Bank planned for one, so important that it only happens once every 200 years?
We are exceptional and this time it's different
It is technically true that a major New Zealand bank has not collapsed, as Dr. Chris Hunt of the Reserve Bank this paper of 2009 on the history of banking crises in New Zealand.
The government had to bail out the Bank of New Zealand twice, the first in 1895 after the collapse of the land boom in the 1870s and then in 1990 after the collapse of the boom in the country. Australasian commercial real estate in the 1980s. But that did not fail in the sense of Lehman Brothers. It was eventually bought and recapitalized by Australian National Bank Bank Australia to limit taxpayer exposure.
Development Finance Corporation went bankrupt in 1989 and was then the 7th largest financial institution, but it was not technically a bank. The same goes for South Canterbury Finance, which failed in 2010 and forced a $ 1.7 billion payment from taxpayers to depositors as it was included in the 2008 retail deposit guarantee system. set in the crucible of the global financial crisis.
And it is there that the banks' confidence in their arguments against higher capital requirements begins to erode.
What we did not tell you about the GFC
Nobody wants to say it out loud, and certainly not on a front page or in any other strong way. And I can write that because I was there and I remember not writing things for fear of being accused (rightly) of shouting "on fire" in a hall. crowded cinema.
At the end of 2008 and 2009, our four big banks were in a precarious situation at various times. They had borrowed most of the money needed to repay the loans they had made to New Zealanders who were buying their homes from each other on the "big" day of 90 days. Billing the money markets in New York and London from 2003 to 2008. At the end of 2008, New Zealand banks were the world's most dependent on these "hot" wholesale money markets. All this went well when the lending counterpart, usually an international bank, was happy to defer these effects to 90 days at ever lower interest rates.
But at the end of 2008 and 2009, these markets froze several times. This meant that banks like Bank of America or Royal Bank of Scotland had asked to be repaid at the end of the 90-day loan granted to ANZ NZ, BNZ, ASB and Westpac NZ. This meant that they should have forced the borrowers to pay immediately or refuse to repay their term deposits. This is what is called a liquidity crisis and the dirty little secret of the bank in a country with fiduciary money (ie not backed by gold) and the Fractional reserve bank (where only a small proportion of bank loans are backed by the bank's shareholders' equity). .
If everyone came forward to demand that their bank deposits be paid immediately in cash, the bank would be bankrupt because it did not have the money (or gold) in its coffers and could not force borrowers to repay their money quickly. That's how banks work. If you want to go deeper into the question of how banks are basically creating money and waiting for bombs, then read this article founder of the Bank of England. It will amaze you in a monetary way.
Banks often borrow in the short term in liquid markets and illiquid markets, in the hope that no one will bluff them and ask for their money at the same time. Everything works well … until everyone asks for their money at the same time. This is why banks are vulnerable to "rush" banks.
These days, we do not attach much importance to the queues of people trying to pull their money out of the banks. But they happened quite regularly. There was one at Auckland Savings Bank in 1893, like Hunt documentedAnd one at the Countrywide Bank in 1985, as Michael Reddell documented, which implied word of mouth, a report on the radio that "there was no truth in the rumor that Countrywide was in financial trouble" and an unfortunate press release from the minor party. Remember, it was at the time before Facebook and Twitter.
It might as well have been a stint at a major bank at the end of 2008. At the time, I was working at Interest.co.nz and I received many phone calls and emails in September, October and November 2008 (when Lehman and AIG collapsed) people asking me if they should withdraw their money from a particular large bank, which will remain nameless. I had no evidence of a particular problem and I had no intention of shouting shots in a crowded theater. I sent all this information to the Reserve Bank and left it as is. But this has impressed me with the fundamental instability of banks with liquidity imbalances (short-term loans and long-term loans), which are based on a highly leveraged approach to operations (ie say significantly less than 20% of the capital).
What the Reserve Bank and the government had to do to save the banks
Due to fear of triggering banking operations or reducing confidence in the banking system, the Reserve Bank and the government did not shout roofs at the end of 2008, whereas they had actually saved the banks. The bailout is a word too strong, but the actions they took and the promises they made with taxpayers' money helped to ensure that it was effective. There was no bank management or liquidity crisis in bulk.
The Reserve Bank helped the four major Australian banks avoid a cash shortfall by lending them more than $ 7 billion by the end of 2008 and 2009 to allow them to recover their own short-term loans from US and European banks. Our government also provided a $ 10.4 billion guarantee of wholesale bonds issued by the New Zealand arms of the four major Australian banks and, of course, by Kiwibank. And then there is the retail deposit guarantee that was to be formulated and put in place on the weekend of October 10 and 11, 2008, after Australian Prime Minister Kevin Rudd shocked a lot of this side of the Tasman by guaranteeing Australian parents. New Zealand had no choice but to spend at the last minute more than $ 100 billion of taxpayers behind these deposits.
Australian banks may have forgotten, but not the Reserve Bank and the last two finance ministers.
Enough for a big crisis
The Reserve Bank has offered banks in New Zealand sufficient capital to cope with a 200-year crisis, similar to the delays used by insurers and other bank regulators. He calculated that the safest possible level before a significant impact on economic growth was about 16%. That's about 12% now. This would mean that banks should accept a return on equity of about 10 to 11%, down from 15 to 16% now.
Most savers are lucky to get 2 to 3% of their bank accounts, before withholding tax. Australian taxpayers say they're taking a bigger risk, but it's worth remembering that they have an effective government guarantee (and always free).
The four major Australian banks have almost the most profitable landscape in the world, as shown in this chart from the Reserve Bank of the May Report on Financial Stability.
The banks argue that the Reserve Bank's proposed regime would put us at the front of the pack when it comes to "gold plating" in our system.
But there is a reason for that.
Our banking system is one of the most concentrated in the world and the bankruptcy of a bank would have devastating effects on the economy. Anyone who would wonder what a government bailout would do would have to turn to Britain, the United States, and Europe, where bailouts followed suit. Austerity has so undermined the vast social contract for democracy that Donald Trump and Boris Johnson are now the respective leaders of the Anglo-American alliance.
In addition, as shown in this chart, changes in equity create a much more equitable competitive environment by removing the inherent advantage of the four large banks from being able to choose their own capital levels using the equity approach. internal models, which three of the four failed to do. respect within the last five years.
And let us not forget that banks have threatened to reduce rural lending after an increase in capital requirements in 2012, but have not done so.
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