This week and the last, the Reserve Bank of New Zealand published two speeches discussing the strength of our financial system. It has been a while that I heard Geoff Bascand and Toby Fiennes on this topic, their speeches were as welcome as they were overdue.

Geoff encouraged banks to be courageous. To support the economy, he called upon them to draw down capital buffers. Toby extolled the virtues of transparency.

Michael Reddell blogged about both speeches, and I largely, if not fully, agree with the substance of his post.

However, despite Michael’s comprehensive tear-down discussion of the two speeches, there is a point that I would like to add to the discussion.

The grilling

But first I want to take you back to October 23, 2018. Just weeks before the RBNZ announced their controversial draft capital proposals, I met with a delegation of RBNZ staff members to discuss their intentions.

There were seven or eight RBNZ employees. Ian Woolford dominated the grilling exchange of views.

All I remember sharing with Ian is that the Reserve Bank could raise requirements to whatever audacious level he desired. Referring to European capital requirements, I explained that 19 percent would still be acceptable. Some European banks were at that level, approaching it, or even exceeding it.

Mind you, at that time nothing was known about the levels of capital the Reserve Bank had in mind. In the absence of that information, I expected the Reserve Bank to follow Australia, a Basel Committee member, which had set an “unquestionably strong” CET1 capital requirement of 10.5 percent. I certainly did not anticipate the whopping 16 percent that the Reserve Bank proposed some weeks later.

The value of credible commitment

I also made it very clear that any decision on capital requirements should be credible and communicated clearly. “Once decided, stick to it. Tell them it is going to be whatever percentage you have in mind. They may not like it, but you are the regulator and ultimately you decide.”

My suggestion about the importance of credible commitment was informed by experience. With my colleagues at the Dutch central bank, we communicated to the banks like that. The banks valued the clarity and our matching commitment. I can even put a price tag on our approach. For example, we approved the first Basel III-compliant hybrid capital issuance, thus enabling Rabobank to meet global capital standards even before they had entered into force. The value of that deal: two billion USD. Had we dithered, then Rabobank would have been forced to delay their plans and enter a sub-standard deal, which would be at the expense of their borrowers and depositors. A sub-standard deal would also contribute less to financial stability.

Unfortunately, the RBNZ failed to communicate their plans credibly. The final decision revealed an about-face: it lowered the requirements significantly. It was also telling that the first response of the RB to the Covid perils was the delay of the entry into force of their capital plans. Add to that the recent promotion of Ian Woolford to Head of Money and Cash. It makes one wonder: does the RB believe its own plans? Moreover, the evidence of the failed capital communication strategy is clear: banks have not moved their capital plans an inch higher since Adrian Orr became RBNZ Governor.

Uncharted territory

So here we are: Toby and Geoff have been instructed to continue to ride that horse. But their messages are transparent nor clear: Toby praises the Financial Strenght Dashboard. He notices the importance of transparency: “Transparency and communication about these actions, decisions and consequences is key to further understanding about our work. It’s important everyone has access to the right information at the right time.” He also notices that more people are visiting this prize-winning web-site. Of course, as, for one, people want to know if their deposits are at risk. (Remember that there is no depositor guarantee system yet, and under the Open Bank Resolution rules depositors can lose money.)

But the Dashboard information is stale (the release of new data happens eight weeks after the end of a quarter) and incomplete. Plans to meet the increased demand for bank-specific information are in the making, but the RBNZ “would aim to refresh the Dashboard in late 2021.” So much for the right to access the right information at the right time.

On post-Covid bank capital, the RBNZ is not clear either. There’s the $47bn headroom number to which any teacher or lecturer would respond by asking for workings. There is an intention to continue the plans from next year onward. But Adrian Orr mentioned the option to delay more than once. And if continued, the phase-in period would be predictably longer.

Geoff agrees with Toby: “The Reserve Bank remains committed to fully implementing the outcomes of the Capital Review. However, as we indicated this past March, this will be delayed one year and not occur until July 2021. We expect to communicate further on the implementation of the Capital Review by the end of the year.” Clarity, clarity, clarity. This in the same paragraph that underscores the importance of banks having sound capital buffers, on a page that warns us about the important consequences of a weak capital base. Unfortunately, this fails to dovetail with Geoff’s call upon banks to drawdown prudently on buffers to support customers.

In short, it looks like Geoff and Toby ride that horse – and do not possess a reliable map. Nor have they the courage to commit to and communicate credibly on a vision the RB has on capital.

Balls please, no horses

My point is this. Last Monday, I attended a speech by Antonia Watson, CEO of ANZ New Zealand. She mentioned that ANZ faced uncertainties going forward. Despite our government managing Covid very well, the world is on fire and there is no vaccine yet, more lockdowns are on the horizon. So yes, I can see where she is coming from. More importantly: Antonia also mentioned that there was uncertainty regarding the RBNZ capital plans.

Here you have it: the uncertainty of the capital plans translates into inaction. Banks are just waiting for an official of the Reserve Bank to commit to whatever capital plans it deems appropriate and meet that credibility bar.

As long as the RBNZ keeps defensively dithering with conflicting, poorly committed and poorly communicated capital plans, our banks will continue to do … precisely: nothing. They will not raise capital. For the simple reason that banks cannot approach investors to stump up capital: how much, when, what quality? And while time progresses, our banks will be forced to accept deals that reflect increasingly unfavourable terms of trade: asset quality will deteriorate, credit losses will accelerate.

All it takes is one press release that outlines the way forward: “This is how much we expect, these are the specs for the Terms and Conditions, and these are the dates we expect you to meet our requirements. Full stop.” How hard is that? You guys have had time since March to come up with a plan, one that works.

There is a reason why the lines in the graph below show a downward trend.