Who cares about bank capital?
It turns out that lowish capital levels at New Zealand banks was the biggest issue to not concern the New Zealand public last year. This despite the Reserve Bank’s year-long campaign, as industry regulator, to convince the country that something should be done.
Reserve Bank governor Adrian Orr lost no opportunity to tell investors, borrowers, bank depositors, and anyone else who would listen, to wake up to the risk commercial banks’ lending posed to the country, loaning too much of other people’s money and not enough of their own.
He announced tough new rules before Christmas, mandating that New Zealand’s biggest banks must steeply increase the amount of their own money put at risk in loans. It is thought the changes will make New Zealand’s capital regime the safest in the world, which is contentious because all that safety is expensive.
Orr argued with bankers and academics, think-tanks and journalists to hammer home his message that the changes were worth the cost: for most people they are likely to mean lower interest on bank deposits and higher borrowing costs. On the other hand, they purportedly reduce the risk of financial crisis in New Zealand to onein-200 years.
But despite his best efforts, Orr could not convert the masses.
Recently released details of the Reserve Bank’s efforts to persuade select groups of the public of the wisdom of the-then proposed changes provide the clearest window yet into ordinary people’s thinking.
Documents describing those sessions were released by the bank, with a slew of other background material on bank capital, shortly before Christmas. It turns out most Kiwis don’t recall much hardship from the last financial crisis, the global financial crisis of 2007/2008, and they don’t fret about bank failure.
That is likely to be why the Reserve Bank chose to hold ‘‘educating’’ workshops, run by third party provider Kantar NZ, rather than simply survey public opinion.
The final report from those sessions concluded: ‘‘First, the public do not readily understand the potential personal and broader social impacts of a potential bank failure – that is, a bank failure impacting a government’s ‘social’ spending and a bank failure impacting an individual’s financial wellbeing in terms of either lost savings or a foreclosed mortgage.’’
In the absence of this understanding, it found, ‘‘it is difficult to see any general public majority support for the proposal’’.
Once paid $300 a head to participate in a four-hour workshop, and primed with conducive information, people’s enthusiasm for stronger rules increased. But that was diluted by failure to grasp the extent of the cost.
Kantar held three sessions with a total of 44 participants.
In Christchurch and Napier, where participants were approaching middle age and older, all but two supported the Reserve Bank’s proposal to boost capital by the end of the workshops.
That is partly because they misunderstood the cost. A ‘‘key reason’’ for support, the final report said, was the misapprehension that the cost would be borne only in the transition period. In other words, people failed to grasp that the cost of this ‘‘insurance’’, as Kantar explained higher bank capital, was ongoing.
It is also remarkable that nowhere among the selected facts fed to participants was there any mention of a real forthcoming insurance scheme for bank deposits.
The workshops were held in August. In July, the Government announced plans to insure as much as $50,000 per bank depositor, a significant buffer for ordinary people against bank failure.
The Reserve Bank and Treasury had also already suggested in a consultation document on deposit insurance that the cost be borne by ‘‘member banks’’ and ‘‘their customers’’ through a levy. It would have been useful to tell the banking public that they would shortly be paying for two new insurance policies.
The result of the Auckland workshop of young adults was even more awkward for the bank.
Participants remained obstinately focused on their own dire housing situation. The cost of increased bank capital would only exacerbate their quest for home ownership and struggle with rising rents, participants concluded. They were not in favour.
That is probably why the Reserve Bank has not talked up the workshop results. Young people want to be saved from apocalyptically unaffordable housing. So much for salvation — on that count Orr and his deputies look more like horsemen.