On 5 December 2019 at 12:01 pm, I received an email from the Reserve Bank of New Zealand. The email announced some important decisions about the Bank’s capital review. As the email contained summary information only, I went to the RBNZ website to get the documents explaining the capital review decisions.
Unfortunately, it was impossible for me to access the relevant documentation. For many minutes the RBNZ web-servers could not handle the internet traffic. Only by 1 pm, I had the documents, read the most important pages, and was able to discuss the plans with a member of the NZ press corps, legal advisers, and a structurer.
The timing of the announcement, at noon, on a trading day, was not very practical. Geoff Bascand in an interview with NzHerald / Business desk, explained that “We had an awkwardness – we wanted to do a public release while the market was open. … That meant we had to brief the banks beforehand so they weren’t taken by surprise.”
Bascand’s explanation hardly compels. Bank capital is complex, few people understand the topic. Like many other capital specialists, I often struggle to get it right. It just takes time to fully digest the information.
A minute-by-minute analysis of the Big 4 share prices
A release of information on such a complex topic, during trading hours, is bound to benefit some people more than others. It is not unlikely that the New Zealand banks, who were briefed during the early morning hours of 5 December, would be in a good position to gain. The question is how much, if at all.
To answer that question, I wrote a Python script that allows me to examine the minute-by-minute share price returns of the Big 4 banks, using data from the Australian Securities Exchange (ASX).*
The picture below reveals the results (click here for a larger pic via mega.nz).
The picture shows the evolution of share returns on 4 (at the left) and 5 December (at the right) of last year. The colours show which bank is which: CBA in yellow, ANZ in light blue, BNZ in dark blue, Westpac in red.
Except for a loss during the first trading minutes of 4 December, the returns that day are largely flat. Share prices gained slightly during the end of the afternoon, which may indicate informed trading, speculative trading, or perhaps insider trading. It is hard to say.
Share prices the next day clearly gained at the RBNZ announcement: all four lines start higher than where they ended the day before. Note that the RBNZ announcement coincided with the opening of the ASX.
Using the closing prices of 4 December as a base, during the first 10 trading minutes of 5 December, the shares of CBA, NAB, Westpac gained on average 1.35 percent, which is a handsome return for sure. ANZ suspended trading for some hours, but around 2 pm that day, its share made a spectacular return of 1.94 percent.
The 3.6 billion dollar courtesy
The percentages shown in the graph above may look small, but if you apply them to the market values of these banks, the total gain is significant. During the first 10 trading minutes on 5 December, investors in the Big 4 earned $3.603 billion: CBA $1.894bn at 12:03pm; NAB:$1.067bn at 12:07pm; and Westpac $642m at 12:10pm. (I ignore ANZ because of the trading suspension).
By the close of business on 5 December, the owners of the Big 4 earned $5.385bn, again, no small fry.
Geoff Bascand explained that the early morning release of information to the banks was “a courtesy of what is a significant announcement that they have to abide by.” One wonders if he realised the value of that courtesy could be as much as $3.603 billion dollars.
The RBNZ defends the red-eye release to the banks on grounds of financial stability: “We don’t aim to surprise.” But, the graph shows that markets were surprised, positively that is, else the graphs would have flat-lined.
The picture above raises some questions. Why was the announcement at noon, at the opening of the ASX, knowing well that the Big 4 would benefit? The graph above indicates that the decision to announce at the start of trading gave some investors a head-start. Especially if they had access to information released earlier that day. They were not affected by the clogged RBNZ web-servers or the email that arrived at 12:01, not 12:00.
Why wasn’t the announcement done when exchanges were shut, e.g. after trading or on a Saturday? That would give the NZ public, of which the interests were at the centre-stage of the capital review, some time to absorb the documents.
Why was the press briefed before the announcement? Judging from the few questions asked about the capital review decision at the press conference shortly after the announcement, it appears as though most journalists struggled to understand the decisions.
Why this spin of the RBNZ not wanting to surprise the markets? I can see why the RBNZ would want to timely inform banks about bad news, but in this case, the news was good for the banks, a Christmas present. Would financial stability be affected by good news? Really? A run was not imminent.
Why did the RBNZ web-server choke on the significantly increased demand for documents, thus giving retail investors a clear disadvantage?
Given the gains at the opening of the market, how sure is the RB that the price increases shown in the graph above were not the result of insider trading?
*I also examined the NZX share price performance of the locally listed banks. These results do not affect my inferences.