In 2000, the Initial vote on Kiwibank in the Labour-Alliance government was 16 votes against from Labour, and four votes in favour from the Alliance.

I was there when this was reversed, and in 2001 the four insurgent Alliance Ministers – Jim Anderton, Sandra Lee, Laila Harre and Matt Robson- received our foundation Kiwibank cards in Jim’s office.

New Zealand once again had a popular publicly owned bank to aid its development and counter the strangling grip of the privately owned foreign banks.

Finance Minister Hon. Michael Cullen said, begrudgingly, that the bank, operating from New Zealand Post premises, would get an $ 80 million loan , but not one cent more. Helen Clark continued her opposition by announcing she would remain an Australian Big 4 customer.

Kiwibank had been a long journey.

So, why had Alliance members campaigned so long and hard for this goal?

Jim Anderton had spelt out the reason in 1988 as the Lange Labour government continued its crash sale of public assets by putting the Bank of New Zealand with its 20 percent share of the banking sector on the auction block. In a 1988 parliamentary speech that led to his expulsion from the Labour caucus Jim Anderton said:

“The sale of State Owned Enterprises transfers ownership, control, wealth and resources from the public sector to the private sector…Once it is sold the policy options available…are almost certainly removed…Even after the worst stock market crash in New Zealand’s history…the Bank of New Zealand made an operating profit of $182 million in the 1987-88 financial year… (it) is virtually a perpetual asset…(and) commands 20 percent of the current financial system.”

As a highly capitalised bank the BNZ, meeting its huge taxation and dividends obligations to the government and with its long history in the development of New Zealand as an arm of government, the BNZ limited the destructive side of  private banks and kept profits and investment capacity in New Zealand.

Within a short time, an expanding  Kiwibank kept local branches open, and rapidly attracted customers. It paid back the initial government capital within 3 years. It now has over one million customers, including over 40,000 businesses.

Michael Cullen, resiling from his initial hostility, was to praise Kiwibank in his autobiography as follows:

“But Kiwibank proved its real worth to New Zealand in the early stages of the global financial crisis. The Australian  banks withdrew substantially from the New Zealand mortgage Market. Kiwibank stepped  into the breach. Despite its very small size compared with the Aussies, it was for a year or two the largest provider of new mortgages…since Kiwibank was set up, the Australian banks have emphasised their New Zealand character…”

Michael Cullen, the former Finance Minister then warned, and Minister Willis would do well to heed,  about the true character of the private banks:

“…when the crunch comes , one should never be fooled  about where their primary accountability will lie.”

In his 1988 speech to Parliament, opposing his own public asset selling Labour Party,  Jim Anderton also outlined the vision which in 2002 was to underpin both the  Kiwibank and  a newly minted  ministry of economic and regional development, of the public bank playing an essential role in national economic development:

“…if it were decided to run an active regional development policy the geographical spread of the branches of the Bank of New Zealand makes the bank the only Government agency with the detailed knowledge required to act of the Government… of providing long-term development funds for viable projects in all the regions…sale of such an extensive economic power…may lead to the operation of the bank for purely financial commercial reasons…small borrowers , and even Governments, suffer when dominant banks  are run for short term financial reasons and profits.”

All of these advantages are now at risk as the government , using the excuse of the need to raise capital for the bank to take on the Big 4, sets out to gift an essential economic tool to the private sector.

The New Zealand Herald revealed the government’s intentions on 25 July:

“In a routine letter of expectation sent to Kiwibank’s board chairman David McLean in April, shareholding ministers suggested they were open-minded as to how Kiwibank grew… ( Minister of State Owned Enterprises ) Goldsmith said the Government had no plans to privatise state assets, but conceded a possible outcome of the purpose statement exercise could  be that it decided it no longer wanted to own an asset.”

Renationalisation Pledge

Warning bells should ring for Labour and the Greens. Labour members and voters triumphed over the initial opposition to Kiwibank of Helen Clark and Michael Cullen to Kiwibank. The Green Party has pledged to oppose asset sales. As Alliance MPs, Green Party founders Jeanette Fitzsimons and Rod Donald campaigned for Kiwibank . Labour and the Greens must form a united front in defence of Kiwibank.  A pledge to re-nationalise and expand through government financing ,there are multiple financing methods available , will deter the circling sharks which include the Australian bank competitors.

Governments of all stripes throughout the world recognise the crucial developmental role of a large state bank as an essential tool for long term investment and development. Labour and the Greens can unite to build on the vision of Jim Anderton and ensure that New Zealand is not, once again, deprived of its state-owned bank by a short-sighted government acting in the narrow interests of the private sector and not in the best interests of New Zealand.

EDITOR’S NOTE: Matt Robson and others are calling on the New Zealand Government to abandon any plans to privatise Kiwibank and to commit to keeping it in public ownership.

You can sign the petition here.

To sell, or not to sell – that is the question various governments have asked since Kiwibank was established in 2002. Now it’s the turn of the current National-led coalition to examine the bank’s state ownership.

Ministers have asked Kiwibank’s board to explore avenues for the bank’s expansion, potentially including private sector or Crown entity investment.

This comes just two years after the previous Labour government spent NZ$2.1 billion to secure complete ownership of Kiwibank, and is part of the coalition’s drive for productivity, growth and public sector efficiency.

The latest attempt to help the bank prosper while staying fully New Zealand-owned should also be seen in the context of the recent Commerce Commission draft report on banking services, which identifies Kiwibank as a market disruptor.

If properly capitalised, the report says, Kiwibank should make New Zealand banking more competitive. Supporters of partial privatisation or publicly listing a proportion of Kiwibank shares agree. They also argue it would boost the stock market and funnel profits back to New Zealanders.

The government has not proposed anything specific yet. But any plans to part-privatise Kiwibank so soon after the state effectively bailed it out deserve close scrutiny. Such a move could well do more harm than good, for four main reasons.

1. Banking concentration is normal

New Zealand’s historical banking concentration and the market domination of four large Australian-owned banks is not going to change any time soon.

But a concentrated banking sector is not at all bad, or even abnormal, and occurs in many countries. Three banks in the Netherlands, for example, currently own 84% of total banking assets. The smallest, ABN AMRO, is larger than all of New Zealand’s banks combined.

Despite this, the Dutch are less vocal about lack of competition and associated high profit margins. There is an acceptance, especially among European Union bank regulators, that the alternative of more small banks is not a panacea.

Small banks in EU countries such as Spain and the Netherlands have failed more often than large ones. Moreover, innovation in banking and finance comes mainly from large banks.

2. Capital investment and growth

The notion that more capital will foster growth puts the cart before the horse. As fans of TV investment shows Shark Tank or Dragons’ Den will know, only firms with a compelling value proposition attract funding.

Kiwibank’s track record leaves something to be desired. For example, the press release accompanying its 2023 results listed the introduction of Apple Pay as an important highlight. Other banks began offering this service in 2016.

Furthermore, at 7.5%, the bank’s return on equity is the lowest of the largest six banks. And its core capital ratio has not increased since 2018, making it harder to meet increasing Reserve Bank capital requirements.

After a minor capital injection of $225 million last year, Kiwibank chief executive Steve Jurkovich said the bank’s loan book could significantly increase. According to the Reserve Bank’s financial strength dashboard, however, the value of Kiwibank’s net loans and advances grew by 2.7% and 1.8% respectively in the quarters ending December 2023 and March 2024.

That was not significantly different from growth in previous quarters going back to 2018, which averaged 2.3%. In other words, Kiwibank’s own experience shows flaws in the capital-before-growth narrative.

3. Foreign ownership by stealth

In an ideal world – with deep and liquid capital markets, and a large, growing and productive economy – having a 100% Kiwi-owned contender bank would work.

In reality, New Zealand lacks these features. In fact, Kiwibank’s ownership restrictions – which preclude floating or selling shares directly – have seen previous owners surrender their holdings to the government.

Part-privatisation would therefore require shares to be sold at a deep discount. And, as the sale of Kiwi Wealth to Fisher Funds in 2022 suggests, this may ultimately be financed by foreign private equity.

This could be achieved by way of a leveraged buyout, where a foreign private equity firm lends large sums of money to, say, a KiwiSaver fund to buy shares. Technically, the KiwiSaver fund would be the 100% New Zealand-owned firm holding the Kiwibank shares. But that ownership would be largely in name only.

The New Zealand owner would pay hefty interest expenses to the private equity firm. And it’s likely the private equity firm would want to tear Kiwibank apart to cut costs and improve efficiency.

By comparison, perhaps the current arrangement – four dominant banks owned by parent banks in a geographically and culturally close country – is not that bad.

4. Unintended consequences

Finally, there is the problem of reputation and moral hazard. Investors would be sceptical if Kiwibank were to be partly privatised, as history shows its ownership seems to depend on the government of the day.

Given that uncertainty, investors might only buy shares sold at a deep discount, or if the shares offered a high return – the kind private equity firms require.

In turn, this could prompt the bank to engage in excessive risk taking, which creates the kind of disruption no one wants. Buyers may also want a guarantee they can put the shares back to the government if the bank fails to perform well.

Rather than rush to part-privatise, Kiwibank should focus on strengthening its capital base, improving performance, and establishing a clear track record of growth and innovation.

Only then should any change in ownership be considered. The path to a more competitive banking sector in New Zealand requires patience, strategic planning and a realistic assessment of market conditions, not hasty structural changes.

Martien Lubberink does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

– ref. Owner beware: 4 reasons why selling part of Kiwibank could do more harm than good – https://theconversation.com/owner-beware-4-reasons-why-selling-part-of-kiwibank-could-do-more-harm-than-good-235885

Political Roundup: Will the Govt act on mega bank profits and reform the banking sector?

The corporate retail banks are making mega profits on the back of Government policies and indirect subsidies of recent years. As a result, there are calls from across almost the whole political spectrum for greater regulation of the banking sector, including windfall taxes. But will outrage turn into action?

Prime Minister Jacinda Ardern led the charge against the banks this week, warning the likes of ANZ – which announced recently that its profits were up 20 per cent to a record $2.3b – that they are at risk of losing their “social license” to operate here. The Prime Minister sounded tough, but she was also quick to admit that she has no intention of taking any action or changing the rules. The Finance Minister Grant Robertson was also fast to rule out any reforms or further investigations.

Critics have said that Ardern’s plea for the banks to have “self-reflection” is wishful thinking in the extreme. The Green Party’s finance spokesperson Julie Ann Genter put forward this analogy: “Expecting banks… to put people ahead of profit would be a bit like putting the fox in charge of the hen house.”

National, too, is pressuring the Government to act, with spokesperson Nicola Willis saying a full investigation needs to be launched into the banking sector, including whether government monetary policy had contributed to the mega profits.

Why won’t the Government act?

Claire Matthews, a banking expert at Massey University, has accused Ardern of grandstanding on the issue, suggesting that if Labour really thought the mega profits were a problem, they would be doing something about it. She suggests today that Ardern is just being an opportunist populist and electioneering: “People like to hate the banks so it’s quite an easy win for the Government.”

Looking at the lack of substance from Ardern on banking, one leftwing blogger wrote yesterday on Labour’s banking policy: “this is why Labour deserves to end up in opposition after the next election: they’re all noise and no policy. They’re offering us literally nothing, just the same tired, unjust status quo.”

Sam Stubbs, Chief Executive of KiwiSaver provider Simplicity, is reported today as saying: “The PM talks about the social license to operate. There seems to be quite a bit of hui but not much doey from the Government on bank reform.”

Stubbs is rather scathing about the dissonance between Ardern’s bank-bashing and her own governance of the banking sector: “These are nice sound bites but so far what the Government has done is slap the banking industry with a wet bus ticket all through the pre-Covid profit period when it was huge, all through the Australian banking inquiry. They then provided them with a massive amount of free money during Covid.”

The Government has handed the banks the mega profits

Stubbs’ critique of government subsidies of the banks is important. He says: “They have received a tremendous amount of tax-payer-funded support. How do they reward us? By making record profits when everyone else is doing it hard.”

Business journalist Bernard Hickey also argues that the big banks have essentially been subsidised by the taxpayer in recent years. Today he writes that “The big four banks got massive help to grow their lending & profits from the Govt in 2020, 2021 & 2022. They get their licenses to print money from the public.” He argues that mega bank profits have been made because of the Government’s “$55b of money printing, abandonment of LVR controls and $16.4b of subsidised lending by the Reserve Bank to banks through the Funding for Lending scheme”.

Hickey also explains that the banks have benefitted from a government guarantee of their sector: “the banks benefit from an implied and unfunded Government guarantee to protect them, especially now the Government is building a deposit guarantee scheme and especially after the Government’s actions during the Global Financial Crisis, when the Government created retail and wholesale deposit guarantees in 2008/09.”

Quite simply, banks have always been keen to privatise the profits from their role in the economy, but then socialise any losses – by getting the state to bail them out and to guarantee their operations.

New Zealand Herald business editor Liam Dann makes some similar arguments today: “Billions of dollars were pumped into the economy by Government and the Reserve Bank to save businesses and jobs and avoid a crisis. A side effect of the stimulus was a property and savings boom through 2020 and 2021. That’s now had the galling result that a sizeable chunk of that cash looks set to line the pockets of Aussie bank shareholders.” And he adds, “When things actually go wrong, taxpayers have to bail them out.”

Leftwing political commentator Gordon Campbell also points to Government policy as behind the mega bank profits: “The banks have reaped the rewards of the government’s successful efforts (e.g. the wage subsidy scheme) to keep the economy relatively buoyant during the pandemic. Not only did those government schemes and capital injections save the banks from suffering the bad debts and mortgage defaults that they’d expected. In addition, the Aussie-owned banks are also now in line to reap further profits from the Reserve Bank’s current efforts to curb the inflation that those initial Covid interventions inadvertently helped to generate. For months, the banks have been able to crank up their lending rates. They’ve also increased their profit margins. In sum, Covid has been something of a joy ride for the banks.”

All of this means that the banks are likely to have a combined profit total of $10b this year. Analysts point out that a 14 per cent rate of return is extremely high for banking, which is a low-risk activity normally expected to make more like half of that rate. Unusually, banks are making much greater profits and return on investments than the average NZX50 Index companies.

As Bernard Hickey points out, the local bank operations in New Zealand are “now more profitable than their parents and almost all their peers in other developed economies”. And according to Victoria University of Wellington’s banking analyst Martien Lubberink, the previous year’s profit announcements showed that the four big banks were making a profit of about $1,200 per New Zealander.

Actions the Government can take on banking

Four different reform areas are currently being proposed by analysts.

The first is a special tax on the current mega bank profits. A “windfall tax” has been proposed for some time, especially by those on the political left. The Greens took up this idea last month, pushing for a one-off tax on companies in super-profitable sectors such as supermarkets, electricity and banking.

Bernard Hickey advocates that Labour adopts the same tax used by the Australian government on banks, arguing today that this “would generate extra tax revenues of $2.6b a year, which would be enough to either pay for a tax cut or extra social spending, or to return the Budget to surplus sooner.” He says that the tax could be a levy of 0.06 per cent on the banks’ loans of $447b.

A second action would be to increase competition in the banking sector. At the moment the lack of competition in New Zealand means that mortgage rates are higher than they should be. Australians get a much better deal from their banks, because a more competitive market has been fostered there. Here, the four big banks are allowed to make a killing without any great attempts to make the playing field level and competitive.

One way to do this would be to invest significantly in the state-owned Kiwibank, which is currently far too small to compete properly. Some critics say that the Government is failing to properly fund the bank which means that it can’t properly compete with the Big Four Australian banks. It simply doesn’t have the assets and economies of scale to make any difference.

Sam Stubbs has argued today that the Government should scale up Kiwibank significantly: “Now the Government owns it yes it can recapitalise it. It would be profitable and the Government would still make money and you would get a serious competitor.”

Similarly, Liam Dann argues today that the best way to scale up Kiwibank would be “with mixed-model ownership in the style of the power companies – something this Government will never allow.” Dann suggests Kiwibank could be doubled in size.

The third action would be a full independent inquiry into the banking sector, as took place in Australia recently. Banking expert Claire Matthews, suggests that the Commerce Commission could also undertake a market study, as they did with the supermarkets and the building sectors. She argues that we simply don’t know how the banks currently operate and what problems there might be with the market and its regulation.

A fourth action would be to open up the banking sector by creating “open banking”, whereby customers can more freely shift between banks. This has occurred in plenty of other countries, and Labour has been accused of being far too slow to act on this.

For example, Stubbs is scathing on the lack of reform in this area: “Why aren’t they doing what everybody else has already done? They talk about open banking – they could have bought it in three or four years ago. We are still waiting for that. They could bring in number portability – we know what that has done for phones – they haven’t done that.” He suggests that the banks have successfully lobbied Labour to delay such reforms.

Liam Dann also comments on this today, explaining that “new blockchain-based tech that allows consumers to control all their banking data and switch providers more easily. In fact, New Zealand is dragging the chain on this initiative which has been adopted in the UK and opens the market to all sorts of new players to offer retail-facing banking services.”

Today, Newshub is reporting Government sources saying that “a mega shakeup” in terms of open banking is soon to be announced. While neither Labour nor the banks are commenting publicly, it’s reported that “Behind the scenes there’s now a scurry to get this out quickly to capitalise on the public outrage over the massive bank profits.”

The banking problem is going to get bigger

Although the Government seems more inclined to try and embarrass the banks into action rather than take a more interventionist or reforming approach, it won’t be enough. In fact, the political situation could get more embarrassing for the Government over the next year.

With rising interest rates bank profits are just going to get bigger. But at the same time, for homeowners these rising interest rates – together with mortgage holders going into negative equity with falling property prices – may result in defaults on mortgage payments. Banks may then have to increase their foreclosures. That’s going to reduce their social license to operate even further.

Banks would be wise to convince the public and politicians that they are “ethical capitalists”. If they can’t or won’t do that, then pressure will mount on the Labour Government to regulate. Government pleas to the banks to be kinder are unlikely to be enough to convince the public.

Increasingly voters are aware that Labour’s monetary policies of recent years led to increased super profits for the rich – including a transfer of about $1 trillion to asset owners. A reckoning might therefore be coming, and politicians will increasingly have to show which side they stand on: with the banks and the super-wealthy, or with the public.

Further reading on bank profits
Amelia Wade (Newshub): Revealed: Major shake-up to banking on its way
Tamsyn Parker (Herald): Super profits: Are banks making too much money? (paywalled)
Luke Malpass (Stuff): Jacinda Ardern bashing the banks won’t distract the public from real-world inflation
Liam Dann (Herald): The Prime Minister is right, the banks have made too much money (paywalled)
Gordon Campbell: On bank profits, and the US midterms
Sam Stubbs (Stuff): How much is too much? Just look at the banks
William Hewett (Newshub): National Party leader Christopher Luxon ‘uncomfortable’ with large profits banks are making
William Hewett (Newshub): Expert defends banks after Prime Minister Jacinda Ardern questions large profits
No Right Turn: All noise and no policy
Jamie Ensor (Newshub): No plan for study into banking profits, Grant Robertson says, despite Prime Minister Jacinda Ardern’s criticism
1News: Bank profits soar as Govt lobbied to introduce windfall tax
Tess McClure (Guardian): Jacinda Ardern says banks ‘wrong’ to take huge profits as cost of living crisis deepens
Rob Stock (Stuff): Bank of New Zealand increases annual profit by 7% to $1.4 billion
Gareth Vaughan (Interest): BNZ CEO predicts ‘more New Zealanders are going to find it tough’ as bank posts record profit
RNZ: BNZ posts record annual $1.4 billion profit

Other items of interest and importance today

RESERVE BANK
Bernard Hickey (Interest): Reserve Bank independence just ended
Peter Dunne: Labour’s meddling and National’s attacks pose serious threats to the independence of the Reserve Bank
Tom Pullar-Strecker (Stuff): Could Adrian Orr govern the Reserve Bank under a hostile National government?
Bridie Witton (Stuff): Why the Opposition is upset about the reappointment of the Reserve Bank governor Adrian Orr
Bridie Witton (Stuff): Why Adrian Orr’s RBNZ Governorship could be shortlived under a National and ACT government
Thomas Coughlan (Herald): Reserve Bank Governor Adrian Orr’s fate will be decided by election (paywalled)
Richard Harman: Luxon changes mind on Orr (paywalled)
Michael Reddell: Reappointing Orr
Molly Swift (Newshub): Economist Brad Olsen says National raises ‘legitimate concerns’ over reappointment of Reserve Bank Governor Adrian Orr without review
RNZ: Reserve Bank governor’s job: New govt needs right to make choice – Luxon
Russell Palmer (RNZ): National ‘shocked’ by reappointment of Reserve Bank Governor Adrian Orr
Ireland Hendry-Tennent (Newshub): National, ACT lambast Government over Adrian Orr’s reappointment as Reserve Bank Governor
Bernard Hickey (Interest): Opposition leader and potential Finance Minister say they’re ‘shocked and appalled’ Orr was reappointed Governor
Susan Edmunds and Bridie Witton (Stuff): National ‘shocked’ by Adrian Orr’s reappointment to head of Reserve Bank
Adam Pearse (Herald): National Party ‘appalled’ Reserve Bank Governor Adrian Orr given another five-year term
Jenny Ruth (BusinessDesk): Mixed reaction to Adrian Orr reappointment (paywalled)
David Hargreaves (Interest): Adrian Orr reappointed RBNZ Governor for five years

ECONOMY, BUSINESS, EMPLOYMENT
Adan Pearse (Herald): Cost of living burden pushes Govt into fuel sector changes
RNZ: Commerce Commission given power to set fairer petrol, diesel prices
Interest: Commerce Commission to get the power to step in and set ‘fair’ fuel prices
Geraden Cann (Stuff): ‘60% of the way to wage-price spiral and hyperinflation Armageddon,’ economist says
Pattrick Smellie (BusinessDesk): High inflation to persist for two years, says Reserve Bank (paywalled)
David Hargreaves (Interest): Up and away: RBNZ’s own survey shows inflation expectations shooting up again
Thomas Coughlan (Herald): Christopher Luxon on the fence about reviving Bridges-era tax indexation
RNZ: Productivity Commission to examine supply chain issues
Adam Stephenson (Herald): Fast-food workers deserve Fair Pay Agreements (paywalled)
Anna Whyte (Stuff): Is the pay freeze nearly over? Early public service pay offer revealed
RNZ: University staff rally at Parliament over proposed cuts

PARLIAMENT
Graham Adams (The Platform): Ardern enters the tragi-comic phase of her tenure
Glenn McConnell (Stuff): Efeso Collins considers standing for Parliament – but for which party?
Jenna Lynch (Newshub): Newshub-Reid Research poll: What New Zealanders really think of Jacinda Ardern, Christopher Luxon revealed
William Hewett (Newshub): National Party leader Christopher Luxon defends reputation after Newshub poll found Kiwis view him as ‘smarmy’, ‘inexperienced’
Brigitte Morten (NBR): Labour changes focus to election prep mode (paywalled)
Michael Neilson (Herald): Labour, National compromise on Māori electoral roll options bill in ‘rare occasion’
Newshub: Dame Jenny Shipley ‘thrilled’ Parliament now more women than men
Jamie Ensor (Newshub): Government exploring changes to proposed electoral legislation to ensure cross-party support
Joseph Los’e (Herald): David Seymour says he is not playing dog whistle or apartheid style politics – and he’s not a useless Māori
Rachel Sadler (Newshub): David Seymour denounces critics who call him a ‘useless Māori’, racist
Martyn Bradbury (Daily Blog): How the Left wins 2023 Election – Jacinda’s electorate coffee dates to maximise MMP dynamics
Kirsty Frame (RNZ): More ‘humane’ sitting hours for parliament needed, Labour and National MPs say
Nikki Mandow (Newsroom): ‘Nobody’s cracked it’ – Govt struggles to fix poor procurement

LOCAL GOVERNMENT
Georgina Campbell (Herald): Greens and Labour clean up in Wellington mayor’s committee appointments
Max Frethey (Local Democracy Reporting): Nelson mayor Nick Smith ‘disappointed’ with local government review
Steven Walton (Press): Christchurch deputy mayor Pauline Cotter keeps seat after recount confirms slim victory
Tim Murphy (Newsroom): Wayne’s first fix – a budget emergency
Verity Johnson (Stuff): We don’t need Wayne Brown to be another Office Rambo

THREE WATERS
Thomas Cramner: Three Waters and He Puapua
James Perry (Te Ao – Māori News): ‘We won’t have a say’ – iwi water representative on Wayne Brown’s counter-proposal
Bernard Orsman (Herald): ‘Outrageous’: Taxpayers foot $2.1m bill for controversial Three Waters Auckland HQ (paywalled)

ENVIRONMENT
Hamish Cardwell (RNZ): Climate Change Minister says COP ‘nightmare’ decision-making process needs to change
Marc Daalder (Newsroom): NZ promises cash for climate damage – is it enough?
Michael Neilson (Herald): COP27 climate change conference: New Zealand announces loss and damage funds of $20 million
Hamish Cardwell (RNZ): COP27: New Zealand offers $20m to developing countries for climate change damage
Olivia Wannan (Stuff): New Zealand becomes third country to offer cash to climate-hit countries
Ian Llewellyn (BusinessDesk): James Shaw heads to COP27 with a $20m promise (paywalled)
Hamish Cardwell (RNZ): Jacinda Ardern skips COP27, says commitment to climate change won’t be questioned
Richard Prebble (Herald): Jacinda Ardern misses a powerful opportunity with COP27 no-show (paywalled)
Injy Johnstone (Newsroom): Number 8 wire thinking for a Net Zero NZ
Felix Watson (RNZ): Climate change tops agenda of New Zealand insurance companies
1News: Govt’s emissions trading scheme ‘vilifies farmers’ – Luxon
Tess McClure (Guardian): Serious concerns raised in NZ about environmental impact of major productions including Amazon’s Rings of Power
Benn Bathgate (Stuff): High Court shuts down hut burning across Te Urewera

HOUSING
Damien Venuto (Herald): The Front Page: Who’s to blame for Rotorua emergency housing crisis?
Miriam Bell (Stuff): Wellington house price slide the biggest in 20 years
RNZ: Double-digit house market declines in main centres, new figures show
1News: Average house values falling by double-digit percentages

HEALTH
RNZ: Health Minister responds to mental health woes at North Shore ED
John Donne Potter ((The Conversation): With a COVID ‘variant soup’ looming, New Zealand urgently needs another round of vaccine boosters
RNZ: Government says no plans at this stage for annual Covid-19 booster for most people
Stefan Dimitrof (Te Ao – Māori News) Petition launched to halt defunding of child cancer medicines
Muriwai Hei (Te Ao – Māori News): Drug Foundation CEO on overdoses: ‘We are failing Māori’

IMMIGRATION, REFUGEES
Katie Todd (RNZ): Ukrainian arrivals say government support lacking in battle to begin new lives
Gill Bonnett (RNZ): Govt looks at Treaty interest in immigration policy
Gill Bonnett (RNZ): In residence limbo: Doctors, split families wait for news from Immigration NZ

FOREIGN AFFAIRS
Thomas Manch (Stuff): Government backs away from autonomous sanctions regime
Sam Sachdeva (Newsroom): How the US midterms will affect NZ
Gabrielle Armstrong-Scott (Stuff): Five reasons Kiwis should care about the US midterm elections

OTHER
Phil Pennington (RNZ): Officials fear anti-government sentiment could impact next census
Oliver Hartwich (Herald): Rebuilding Better: Once world-class, NZ’s education system is now a disaster. How do we fix it?
Gavin Ellis: Alarm bells must bring out disinformation fire fighters
Lloyd Burr (Today FM): Jenna Lynch, Mani Dunlop are two of the most impartial journalists I know
Thomas Manch (Stuff): Anti-money laundering regime to be tweaked after sweeping review
Riley Kennedy (BusinessDesk): No quick fix to ease anti-money laundering burden (paywalled)
Emma Hatton (Newsroom): Privacy case throws up liability questions for social media groups
Pokere Paewai (RNZ): Taonga stolen during Crown invasion of Maungapōhatu returned
Ashleigh McCaull (RNZ): New study suggests Māori settlers arrived in Aotearoa as early as 13th century

Papua New Guinea’s biggest bank — Bank South Pacific with major branch networks across the Pacific region — is the subject of regulatory action by the country’s banking regulator BPNG over failure to comply with anti-money laundering regulations, reports the PNG Post-Courier.

The Financial Analysis and Supervision Unit (FASU) of the Central Bank yesterday took regulatory action against the BSP Financial Group Ltd for alleged non-compliance.

The action includes the issuance of a formal warning under section 100 of the Anti-Money Laundering and Counter Terrorist Financing Act 2015, an enforceable undertaking from BSP that it will remove and replace certain executive management staff and for the BSP to engage an external auditor to determine the full extent of the underlying good governance and best business practice issues that were identified during the onsite inspection by FASU.

The external auditor’s examination will cover enhanced customer due diligence practices employed by BSP on all high risk and politically exposed people who are customers of BSP.

The director of the Financial Analysis and Supervision Unit of the Central Bank, Benny Popoitai, said in a media release: “The nature of BSP’s non-compliance is serious enough for FASU to have issued an infringement notice, however, FASU has chosen to apply a formal warning instead, making this the first occasion of regulatory action undertaken by FASU against BSP.”

Among the alleged breaches detailed by FASU were BSP’s alleged failure to:

• conduct ongoing due diligence in respect of all of its business relationships in contravention of section 17(1) of the Act;
• ensure that transactions carried out on behalf of its customers are consistent with its knowledge of the customer, the customer’s commercial or personal activities and risk profile contrary to section 17(2)(b) of the Act;
• ensure that ongoing enhanced due diligence is conducted with respect to politically exposed persons in accordance with section 29(b) of the Act;
• conduct enhanced customer due diligence in accordance with the requirements of sections 27 and 28 of the Act where it had taken the view that the customer was a politically exposed person contrary to section 26(1) of the Act;
• obtain information relating to the source of the assets or the wealth of the customer when conducting enhanced due diligence contrary to section 27(b) of the Act;
• take reasonable steps to verify information relating to the source of the assets or the wealth of the customer contrary to section 28(b) of the Act; and
• take all reasonable steps to identify whether a customer or beneficial owner is a politically exposed person contrary to section 29(1) of the Act.

According to Wikipedia, BSP has 35 branches throughout Papua New Guinea and in eight other countries.

Outside PNG, the bank’s operations span Cambodia, Cook Islands, Fiji, Laos, Samoa, Solomon Islands, Tonga and Vanuatu. It also has correspondent banking relationships with Bank of America and Wells Fargo.

Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) provide correspondent banking services to BSP in Australia, providing a gateway for BSP’s clients from across the Pacific to transfer money in and out of Australia.

BSP employs more than 3000 people and services more than 650,000 business banking customers throughout the Pacific.

On site inspections
The FASU media release said the unit had conducted on site inspections on BSP in 2019 and late last year it had issued the bank with a “show cause notice” requiring it to explain why FASU should not impose enforcement action.

BSP’s response to FASU was a blanket denial without any acknowledgement of the deficiencies highlighted.

This, said Popoitai, had left FASU with no choice but to apply regulatory measures.

He also said: “FASU expects BSP to co-operate with the regulatory measures imposed.”

Penalties for breaching this Act are a fine of up to K500,000 (NZ$205,000) or imprisonment for a term not exceeding 5 years or both, or a fine of K1 million (NZ$410,000) for a body corporate, for each offence.

When contacted, BSP’s chief executive officer Robin Fleming told the Post-Courier: “At this stage BSP is unable to comment.”

However, in a later statement to the Australian Securities Exchange today, the BSP group insisted it has complied with the regulations and was considering its “legal options”.

According to the Australian Financial Review, an enforceable undertaking is being sought with the bank to “remove and replace certain executive management staff”. This is understood to include Fleming.

BSP will also be required to hire an external auditor to ensure it complies with anti-money laundering laws in the future.

Article by AsiaPacificReport.nz

On Project Syndicate – and in other places in recent months – orthodox US economist Kenneth Rogoff has presented the case for deeply negative interest rates. Another financial sacred cow falls; yes, interest rates can be negative, even substantially negative. It can take a while, though, for shot sacred cows to die. Keynes, in the 1930s, mortally wounded the ‘balanced budget’ bovine. And the experiences of Japan in the 1990s, and the United States in the Second Gulf War (when taxes were cut), dealt to the hallowed cow of ‘fiscal responsibility’. Yet those ghostly cattle-beasts still stalk the minds of politicians, bureaucrats, and journalists.

Interest as a Yield

Interest is a mystery to most of us. It’s actually two conceptually distinct – though related – things. Interest in nature is better referred to as ‘yield’. We may think of a herd of beef cattle. The gross yield is essentially the calves, with the net yield being the beef and leather produced, subject to the constraint that the herd is maintained over time at its usual size.

Thus, the concept of ‘yield’ is similar to the concept of ‘profit’. In a bad year for the farm, there may be a loss, for example because a natural disaster led to the death of all the calves. In that sense, the yield – or interest on capital – can be negative. Further, with this concept of interest, negative interest is unequivocally a bad thing, and the higher the interest (ie yield) the better.

When I was a boy, we had school ‘banking’, a basic saving account using the symbol of a squirrel, supposedly a creature that saves (nuts) due to an instinct of thrift. We received interest on our school savings, something those squirrels never did on their savings. The squirrels’ yields on their hoards of nuts are always negative; some of those nuts go missing or deteriorate. (For squirrels to gain a positive yield, they would have to plant most of their nuts, then wait until the new crop of nuts could be harvested.)

I also remember my mother explaining to me the difference between a ‘savings bank’ (such as the Post Office Savings Bank) and a ‘bank’ (such as the Bank of New Zealand). She said that interest was a ‘reward’ for saving money. And she said that money held in a bank account did not earn interest; actually, customers paid fees to hold their money there. But, she said, they could draw on their ‘money in the bank’ by writing cheques to other people. So I understood the ‘principle of convenience’. I cannot say that I really understood the reason for the ‘reward’, though. It was in another, later, conversation with my mother that I learned about lending; and it bothered me then – as it bothers many – to think that, if I had money in the bank, then somebody else might be spending it; hence a reward was justified. I eventually understood banking; indeed, in the days before banks became financial supermarkets. I had to study economics academically, however, before I had any real inkling about where money comes from.

My generation – and other generations –  grew up to learn that interest is natural, and always positive. And we learned that the secret to wealth was restraint and compound interest. Thus, we came to see indefinite economic growth in the same way, as a process of accumulation rather than circulation. The idea that squirrels saving nuts indefinitely would become wealthy was always an illusion; likewise, economic growth as a process akin to compound interest was always an illusion.

I learned – when an adult, through financial economics – that interest can be a ‘price’, as well as a ‘yield’. (In fact, interest is two prices. One of these is the price of ‘risk’. Different borrowers have different risk profiles. Higher risk borrowers pay a higher price to borrow money. I am not particularly concerned here, however, about that price which is commonly called ‘risk premium’.) Interest is a price, that if set correctly, regulates economic life; it can facilitate growth when growth is needed, and facilitate slowth when slowth is needed. Very low interest rates penalise the pointless accumulation of money, and facilitate the circulation of money.

Interest as a Market Price

If we can imagine interest rates being three percent (as they usually were when I was a boy), and, the amount of money lenders wanted to lend being the same as the amount of money that borrowers wanted to borrow, then the ‘price of loanable funds’ would be three percent, and that market would be balanced.

If there was a shift in this ‘loanable funds’ market, with say more people wanting to borrow, then excess demand for loanable funds would require the interest rate to increase. Following that price increase, this market would establish a new balance.

What if there was a change in circumstances (other than a rise in interest rates) that caused fewer people to want to borrow money. Or caused people to repay loans more quickly? Or more people to want to lend money? Or people wanting to be repaid more slowly? Or more people wanting to relend money that has been repaid?

These situations would induce a fall in interest rates. And there is no necessary reason why that price fall should stop at zero.

However, if banks could lend money to the Reserve Bank and get one percent interest, they are unlikely to lend to anyone else unless the banks charge an interest rate above one percent. So, for the market to balance properly, the interest rate set by the Reserve Bank should reflect underlying conditions in the loanable funds market.

If underlying conditions require that the Reserve Bank set a negative ‘Official Cash Rate’, then so it should. It would mean that the Reserve Bank’s large wholesale customers – the banks and the central government – would be paid to borrow from the Reserve Bank.

Obviously, if borrowing from the Reserve Bank increased too quickly in response, the Reserve Bank would have to reset the rate back to positive or zero. But what if these customers were not sufficiently induced to borrow more by negative interest rates, then the Reserve Bank would have to ‘go more negative’; interest rates would keep dropping until balance is established in the loanable funds market.

If the interest rate (price) is set too high, there will be too little borrowing and spending, and many frustrated lenders. The result may be an economic recession. If the interest rate (price) is set too low, there will be too much borrowing and spending, and not enough people wanting to lend. The result may be some inflation.

It is worth noting that some economists in New Zealand – Eric Crampton (of the New Zealand Initiative) for one – favour negative interest rates (pure expansionary monetary policy) over an expansionary fiscal policy where governments borrow (and spend) enough to allow the interest rate to stay positive. This is the view generally favoured by economic liberals; economists and others who are sceptical of governments having too large a presence in the market economy. This scepticism is based partly on a general distrust of large government, and partly on a disbelief in the competence to bureaucrats to make the best spending decisions. Economic liberals generally see private spending as more efficient, at the margin, than government spending. (‘At the margin’ means considering ‘extra spending’ rather than ‘total spending’.)

Certainly, if governments fail to take on enough new debt this year, the case for negative interest rates will strengthen. And the case for deeply negative interest rates in countries more affected by Covid19 than New Zealand will be strong if governments in those countries run insufficiently large budget deficits.

Negative interest rates in the past

Except for the recent cases of Sweden, Denmark, Switzerland and Japan, I know of no historical cases of negative nominal interest rates. But negative real interest rates have been quite common. The last time we had substantial negative real interest rates in New Zealand was from the late 1960s to the early 1980s. Then, inflation rates were higher than interest rates, so saved money would buy less in the future than in the present. And repaid money could buy fewer goods and services than the money could have bought if it had been spent instead of lent.

While the capitalist world did not fall apart in the 1970s, many people felt that they were entitled to positive interest rates, without ever being able to say why. And those people instigated a revolution, called neoliberalism.

In today’s world, without inflation, negative real interest rates also mean negative nominal rates. (An interesting case, however, is Switzerland, which for a while had negative inflation and less negative interest rates, meaning that real interest rates were not negative.) Thus (unlike in the 1970s), the quoted (or ‘headline’) interest rates – at least in wholesale financial markets – would have to be negative. This is what makes some people very uneasy.

In my chart analysis of Sweden and Australia, I noted that there was a particular reason why Sweden, Denmark and Switzerland had to have negative interest rates. In order for these countries to have similar trade surpluses as their comparable countries inside the Eurozone (Germany, Netherlands and Austria), they had to avoid appreciations of their currencies. That meant they needed interest rates lower than in the Eurozone; and the Eurozone had a core wholesale rate of zero.

The Swiss Franc has been stable against the also-strong United States dollar since 2014. Many people prefer to hold money in Swiss Banks despite the negative interest they ‘receive’; to these people, it’s like paying a fee to keep their money in the best place for them; not unlike the situation my mother told me about in relation to banks in the 1960s.

Deeply Negative Interest Rates

It may well be necessary for interest rates in some countries to go deeply negative. That will mean negative retail interest rates (term deposits), and negative mortgage rates.

Imagine deposit rates and mortgage rates set at, say, minus two percent.

The situation would not be fundamentally different from that of the 1970s, when the incentive was to borrow and spend rather than to save and lend. But, the obvious new problem is that people will want to drain their interest-bearing bank accounts, as stashes of cash, and then bury this cash under the bed, or some such place.

Fortunately, the world now has an infrastructure for cashless transactions. It would not be necessary to ban cash – notes and coins – entirely, though fear of infection from paper money is probably precipitating the end of cash. While notes and coins are convenient for small day-to-day payments – especially when there are power cuts or other infrastructure failures (such as software virus pandemic) – we could still make promises (the oldest form of money ever). One benefit would be to abolish all banknotes worth more than $20, forcing the criminals with large stashes of cash to come to the bank, and explain how they acquired so many high-denomination banknotes.

Another advantage would be that, with no real alternative to electronic money, then fees charged to vendors using EFTPOS (and the like) would have to be abandoned.

The most important thing would be that we would understand that – at certain times – it is irresponsible to not spend our incomes, and that such anti-economic behaviour as money hoarding would incur a cost. It would mean that high-income frugal people would be incentivised to earn less in the market economy. There would no longer be an incentive for people to earn very high incomes, and there would be more space for today’s disadvantaged people to earn adequate incomes.

In other words, interest rates that at first sight should lead to more spending could in fact lead to sustainable living. In turn, as some people choose to earn less and lend less, then conditions would gradually come to favour a return to higher (zero or positive) interest rates.

Thinking outside the box

Even orthodox and conservative economists can think out of the box. They can apply their economics’ training to new situations, so long as they can free themselves from non-economic constraints on their thinking.

Too much of our policy chatter is conducted either by people unable to think like economists – most politicians, bureaucrats, journalists, businesspeople – or economists and financial analysts who have studied economics but whose cultural backgrounds have inhibited them from grasping the creative power that economic thinking can give them.

Substantially negative interest rates represent one very important thought experiment that well-taught students of economics can lead public discussion on.

————————————–

Bernard Hickey: Why Reserve Bank Governor Adrian Orr prefers negative interest rates to QE, Stuff, 12 Aug 2019

Susan Edmunds: What is a negative interest rate, and what would it mean for you? Stuff, 19 May 2010

Clancy Yeates: ‘Unthinkable’: Negative interest rates now routine around the world, Stuff, 23 Sep 2019

Kenneth Rogoff: The case for deeply negative interest rates. Think Outside, 11 May 2020

Evening Report looks into the separation of Kiwibank from New Zealand Post, and considers the impact on the public’s access to banking services in their communities. Kiwibank. What’s going on?

Kiwibank and New Zealand Post are in the process of separating the two businesses. This means that both Kiwibank and New Zealand Post are looking at their network models, going forward.

Kiwibank’s decision means that they are looking at having two different types of branches.

One type will be Kiwibank owned and will concentrate on purely banking services. The other type of Kiwibank outlet will be a Transactional Plus model for franchise branches.

This new model will affect the availability of services at the franchise branches which incorporate New Zealand Post.

There will be a reduction in services regarding opening and closing accounts. Foreign currency services will also be affected.  Though it is understood that many franchise branches may still be able to continue providing these particular services.

Kiwibank Closures

Kiwibank launched in 2002 and by the end of that year had 211 branches situated throughout New Zealand. It was the brainchild of the late Jim Anderton, who advanced the idea that New Zealanders needed a bank of their own, a bank that operated on Kiwi values and as an alternative to dominant foreign owned and controlled banks. Kiwibank’s business model was pitched while Jim Anderton was the leader of the Alliance Party and deputy prime minister in the Labour-Alliance coalition government (1999-2002).

Kiwibank was able to open so many locations due to Kiwibank’s banking services being partnered with New Zealand Post. It was a clever move that ensured Kiwibank had a presence and branch all over the country.

But now, New Zealand Post and Kiwibank are in the process of separating out their services. This process will lead to a reduction of the number of actual physical branches.

As at October 18, 2019 there were 208 total physical points of presence for Kiwibank (number excludes ATMs).

This number is broken down into:

• 42 standalone Kiwibank branches (financial service only)
• 33 co-located shared service branches
• 115 co-located franchises
• 18 Kiwibank agents (transaction only).

In the period October 1, 2018 to September 30, 2019: 24 Kiwibank outlets that were shared with NZ Post were transitioned  to standalone Kiwibank branches in the same location. Kiwibank also relocated in five areas – Tauranga, Henderson, Queenstown, Ashburton, and Porirua. Kiwibank also withdrew from 18 shared premises.

According to Kiwibank, where they have made the decision to withdraw, there are other branches in close proximity (no more than 15km away).

Kiwibank states: “We are also part of the NZBA coordinated Regional Hubs pilot and will provide shared banking services with five other banks in four regional locations including Martinborough, Opunake, Stoke and Twizel.”

In the next 12 months, Kiwibank has confirmed withdrawal dates for six locations. Also, Kiwibank is relocating in two areas, Westgate/North West and Newmarket, and opening a new Kiwibank standalone branch in Sylvia Park. Kiwibank also intends to transition five other shared Kiwibank and NZ Post shops to standalone Kiwibank branches which will stay in the same location.

Kiwibank has also confirmed it’s working through additional closure plans and communicating its intentions for further closures over the next 24 months.

Kiwibank defends its decision to close branches by pointing out that it is committed to retaining a presence in the regions and investing in standalone branches in places such as Westport, Whitianga and Tokoroa.  For customers in urban areas where Kiwibank has withdrawn services other banking options are suggested.

In correspondence with Evening Report, Kiwibank states: “Branch numbers will continue to change as our separation from NZ Post plays out. For every city where we consolidate there is a regional town celebrating our investment in their community.”

It adds: “As you can see these changes are complex and the numbers constantly changing. Driving our strategy is feedback from Kiwibank customers who are telling us they want an environment better suited to more in-depth financial conversations. This means a focus on financial services and consideration to how we best meet customer demands and stay relevant for our customers in to the future.”

The Banking Environment – Physical banking services in New Zealand (as at October 2019)

Although it is the fifth largest bank in New Zealand, Kiwibank still has the largest retail footprint in New Zealand.

According to the 2018 KPMG Report on banking, Kiwibank is the only bank with more than 200 physical points of location.  Australia New Zealand bank (ANZ) had 179 branches in 2018 while Westpac had 161 locations throughout New Zealand.  All the major banks had a reduction in physical locations for banking according to the KPMG survey.

Kiwibank’s suggested solutions to reduced services

Senior citizens challenged by the modern internet world and the potential closure of their Kiwibank are being offered the support of a “Kiwibank Angel” and a hearty cuppa tea. This is designed to help people who remain unfamiliar with internet banking, to learn, or be assisted to complete their banking tasks.

Kiwibank also intends to tackle growing customer dissatisfaction with the withdrawal of physical banking services by partnering with Digital Inclusion Alliance Aotearoa. This is an Alliance that delivers ‘Stepping UP’ Digital Banking courses in libraries and community centres across the country. This course is open to anyone, not just Kiwibank customers.

Other ways Kiwibank intends to mitigate grumpy customers that feel ‘Jim’s bank’ is being messed with is by supporting Digital Inclusion Alliance Aotearoa’s DORA (Digital on Road Access) – a portable bus unit that travels around Aotearoa offering online banking training in retirement villages, near Marae and in other community locations.

At some Kiwibank branches there are a number of services provided such as providing identification through the Real Me service.  But how many branches provide these services, and can new owner operator franchise outlets choose not to provide these and other services?

Kiwibank responds: “As at today we have 87 locations which provide RealMe identity services. Locations of the outlets offering RealMe is determined by geographic spread for the service rather than by operator choice. To date we have only included the service in eight of our standalone Kiwibank branches due to geographic coverage requirements.”

But is this good enough?

At present the banking jury is out on whether Kiwibank’s solutions will work in transitioning, and appeasing, discontented customers who want face-to-face customer service.

Kiwibank states: “Like other industries banking is being disrupted. The preferences of our customers are changing, and we must evolve to stay relevant.

“Although it is the fifth largest bank in New Zealand Kiwibank still has the largest retail footprint and we’re proud of that.

“We have committed to retaining a presence in the regions, investing in standalone branches in places such as Westport, Whitianga and Tokoroa. Where we have withdrawn services, it is in urban areas where there are other options nearby.

“We’re putting a lot of effort into education and support for our customers, especially those challenged by a changing world,” Kiwibank states.

Kiwibank’s board of directors are appointed by shareholders of Kiwi Group Holdings Limited (ACC, NZ Post and NZ Super Fund) in accordance with the Shareholders’ Agreement and requirements of the Reserve Bank. The shareholders are the New Zealand Government, currently represented by various ministers in the Labour-led Government.

EDITOR’S NOTE: Evening Report is continuing its investigation into whether Kiwibank will retain the elements of its original purpose and presence. We are seeking a response from the Government and have Official Information Act requests lodged with appropriate ministers. To be continued…

There continue to be so many unanswered questions about Hisco’s departure from the ANZ, and for many journalists the story just doesn’t seem to add up. For example, writing on the Interest business website, Gareth Vaughan says The scale of departing ANZ NZ CEO David Hisco’s public humiliation by his employer doesn’t fit the crime he’s said to have committed.

He wonders “why wasn’t some agreement reached that didn’t require him to be publicly thrown under the bus?” But here’s his main point: “it’s hard not to wonder if there’s more to Hisco’s departure than publicly claimed by ANZ. Whilst undoubtedly a bad look, Hisco’s alleged conduct is hardly the crime of the century. Especially not for a CEO who must have met his shareholder’s financial expectations over almost a decade, and who has worked for ANZ for 39 years.”

Like other journalists, Vaughan suggests that it had more to do with a recent, more substantive, scandal in which ANZ was in huge trouble with the Reserve Bank for not following some important lending rules: “Hisco’s tenure as ANZ NZ CEO was certainly blotted recently with news the bank was being censured by the Reserve Bank, which also revoked ANZ NZ’s accreditation to model its own capital requirements for operational risk, citing a persistent failure in controls and the director attestation process at the country’s biggest bank that dates back five years. The attestation failure is a big deal… However in Monday’s press conference Key blamed a junior staffer for the events leading to the Reserve Bank censure.”

John Key’s role in all of this – as Chair of ANZ NZ, and Hisco’s executioner – is being focused on by a number of journalists. For Hamish Rutherford, Key’s performance on Monday to explain Hisco’s departure was very impressive, but in reality “Key is starting to look like an advertisement for stronger regulation” – see: ANZ is building a case for stronger bank regulation.

In terms of the scandal involving ANZ’s problems with the Reserve Bank, Rutherford was alarmed to see “his blithe dismissal of concern about the way ANZ’s board handled itself around its failure to discover that it had been using an unauthorised model to calculate part of its operational risk model, since 2014, without knowing about it”.

Rutherford sees Key’s casual dismissal of the details of the serious failings of ANZ as actually making it more likely that stronger regulation will result: “It all sounded pretty plausible in real time, but Key’s performance has surely put both the organisation he heads, as well as the industry, under more scrutiny. After all the drama of the Royal Commission into the financial services industry in Australia, everyone in New Zealand banking circles is aware that the Reserve Bank is sensitive to claims that it is a light touch regulator which is being gamed by the money boys. ANZ might believe its board was entitled to rely on what it had been told, but no one else has been held responsible for the mistake.”

And now the Reserve Bank is under scrutiny for its regulatory rule of the banks, particularly for allowing ANZ to get away with flouting the rules for so long. According to Rutherford, Finance Minister Grant Robertson will very interested to ascertain if the Reserve Bank’s regulations are too light: “Robertson will soon move to the second stage of a review of the Reserve Bank, with this one looking at whether or not the current regime under which it regulate banks – which to a large extent is based on trust – is adequate.”

The best single article examining John Key’s role in the multiple ANZ scandals has been written by Bernard Hickey, who suggests that Hisco’s axing is an attempt by Key to stave off other resignations (including his own) and to generally prevent the sort of scrutiny that might lead to a Royal Commission of inquiry being established – see: The smiling assassin returns for his biggest hit.

Hickey reminds us of Key’s previous modus operandi as prime minister of “quickly and cleanly cutting out people who he saw as having failed or erred, and were dangerous to National’s success in government.” He suggests that the same ruthless leadership style is on display here, and that “Hisco represents Key’s most significant engineered exit” yet.

Here’s Hickey’s conclusion: “Key’s removal of Hisco was the least he could do to protect the bank, to show leadership for the big four banks’ reputations here, and to protect his own position, especially in the eyes of the ANZ group board, which he is a member of. He faced some big calls as Prime Minister. He just made his biggest one yet in his directorial career. It remains to be seen whether it’s enough to save his own position, ANZ’s position, and to stave off a Royal Commission here.”

Similarly, Gordon Campbell today writes that “Hisco’s managed exit is just another conduct and culture diversion. It should be treated as a scapegoating exercise, and not as a genuine gesture of reform” – see: On our Wild West banking culture.

Campbell views this episode as a good example of obvious complacency in the banking sector, as well as complacency from the politicians about the need for a proper inquiry: “Another example of Key being asleep at the wheel? Maybe so. Remember how – when the Australian Royal Commission into banking came up with its damning findings in February about how the banking industry operated – our bankers and politicians claimed that we did things differently here? We were supposed to believe that whatever bad things the parents of the Aussie banks that dominate our banking environment did at home, their branches here behaved quite, quite differently. Yeah right. Somehow, the recent Reserve Bank and Financial Markets Authority inquiry into the conduct and culture of our banks missed the debacles at ANZ entirely.”

One banking insider – former BNZ chairperson Kerry McDonald – has been particularly scathing about the role of Key and his fellow ANZ board members. He asks: “So what was the New Zealand board doing to manage and monitor expenses?”, and he says “If the ANZ board is not capable of having systems and processes in place that identify problems of this nature – chief executive spending or the way risk is managed – then you’ve got to have serious doubts about their ability to run a bank” – see RNZ’s ANZ boss’s departure raises ‘serious doubts’ over NZ board’s ability.

There have already been more limited inquiries and review set up. But these are not assuaging McDonald’s concerns, according to this article: “Mr McDonald said the recent banking sector inquiry was ‘once-over-lightly’. He said the Finance Minister should get directly involved, and it was time the Reserve Bank showed it could regulate the sector effectively, or that there were wholesale changes at the central bank.”

The same report quotes Prime Minister Jacinda Ardern playing down the need for intervention: “Ardern doubted that the central bank was failing to do enough. ‘That’s not something I would necessarily have thought was true.’ She said the banking inquiry was focused on whether consumers were being treated fairly, rather than the personal integrity of those operating in the sector.”

There are now renewed calls for some sort of Royal Commission of inquiry into the banks in New Zealand. The leading voice is former banker and current KiwiSaver provider Sam Stubbs. He has written an opinion piece arguing that, although the Australian banks insist that they operate with greater ethics in New Zealand, “the opposite seems to be unfolding” – see: ANZ’s David Hisco debacle shows New Zealand needs a banking Royal Commission now.

Here’s his case for a thorough inquiry: “This debacle shows that a Royal Commission of inquiry into banking is sorely needed in New Zealand. The FMA and Reserve Bank do not have the powers of enquiry a Royal Commission would have. Management need to be under oath and whistleblowers protected by law. It would cost approximately 1 per cent of bank profits this year, and give everyone confidence. Given this is an industry that is so critical to our individual and collective wellbeing, a properly resourced enquiry is what we deserve. And politicians should establish one quickly”.

Stubbs has also argued that it’s a potential conflict of interest for John Key to be a board member of both the local New Zealand operations of ANZ and also the Australian-based parent company. Similarly, he says “Doug McKay is chairperson of BNZ, and on the board of parent company NAB. In holding dual directorships, both are potentially conflicted. In tough times they could be in the unenviable position of having to choose whether to look after the parent company in Australia, or their NZ subsidiary” – see: ANZ and BNZ directors can’t have a bet each way.

Finally, this week’s ANZ CEO expenses scandal is far from being the first time that bank has been in serious trouble. In fact, the ANZ has had a whole list of dodgy dealings in recent years, which is covered well by Rob Stock in his article: Six times ANZ has been in regulators’ naughty corner.

For the full details of the downfall of ANZ CEO David Hisco, see RNZ’s ANZ CEO leaves due to ‘blind spot’ on recording expenses – John Key. This reports on the press conference held by John Key and acting CEO Antonia Watson to explain Hisco’s departure. Key, who is ANZ’s New Zealand chairperson, explained that “Hisco believed he had authority from the previous chief executive to spend money on the cars, but because this was ‘oral authority’ it was difficult to prove or disprove.”

According to Key, the outgoing CEO would be paid the rest of his year’s salary but will “forfeit unused options to buy shares in ANZ, worth about $6.4m.”

What is perhaps the most interesting and revealing aspect of this scandal is that it’s a scandal at all. It certainly should be, but it simply wouldn’t have been in the past. The idea of a CEO hitting the headlines and being forced out for relatively minor expenses being “mischaracterised in ANZ’s books” would have hardly been conceivable a decade or two ago.

What’s more, this is the CEO of New Zealand’s biggest bank, and the most profitable company in the country – last year ANZ made a record $1.98b. By all accounts, Hisco was a high-performing leader, which is why he was on a salary of $3.8m a year. That salary might go some way to explaining why Hisco might have thought that his expenses of something like $5,000 a year for chauffeur services and wine storage wouldn’t be a big issue for ANZ.

But the world has changed so much. Especially since the huge upheaval of the 2008 global financial crisis, there has been a whole new way of looking at wealth, power and elites. Suddenly it has all come under scrutiny, and the wider public has become much more sceptical and attuned to the problems of inequality, corruption, and general unfairness. The age of anti-elitism means that “privilege” and “discrimination” are now the watchwords in democracies like New Zealand. And matching this is a significant decline in levels of public trust in business (and other elites such as politicians).

Many commentators are actually surprised to see this happening. For example, today The Spinoff’s Alex Braae labels it an “extraordinarily unusual departure”, saying “I’ll admit, I wasn’t aware that was a sackable offence for highly paid CEOs, as opposed to just being standard practice” – see: Key rolls back the years with presser performance.

But there’s no doubt Hisco’s downfall is a huge deal, and it’s fuelling further criticism of others in the banking industry. For example, banking critic (and founder of a not-for-profit KiwiSaver provider) Sam Stubbs, argues this scandal again shows the need for a clean-up of the whole industry. He’s put forward his “cockroach theory”, which “says that if you find one under the fridge, there is rarely just one. And so it seems with ANZ” – see: ANZ’s David Hisco debacle shows New Zealand needs a banking Royal Commission now.

Stubbs suggests others might also be responsible for Hisco’s incorrect expenses not being discovered, and that further action is needed: “That’s also shareholders’ money, and we also want it back. And if Hisco won’t pay it, perhaps the board of the ANZ should, because for nine years this went on under their watch. A question also needs to be asked of the Reserve Bank and Financial Markets Authority regarding their recent inquiry into the conduct and culture of the banks. How did they miss this?”

As a sign of how much public sensitivity there is to the role of elites, there is now a greater inclination in the media to report how ordinary people feel about scandals. For the best example of this, see Susan Edmunds’ How do ANZ customers feel about financing the cars and wine CEO David Hisco put on the tab?.

This article cites a marketing academic at the University of Auckland, Bodo Lang, discussing the likely reaction of ANZ customers: “He says many consumers already struggle with how much bank bosses are paid. There’s definitely something about being stung $12 for paying a credit card bill late when the boss of the company is putting a wine ‘collection’ on the tab.”

The wider point of the article, however, is that the public has become very distrusting of the banks in general: “If you asked most people what they think of the banks, the answers probably wouldn’t be complimentary. As the big-four banks record profit after record profit, many New Zealanders think it’s coming at their expense. Consumer NZ found this year only 35 per cent of consumers think banks have their best interest at heart. Almost half said they couldn’t be trusted.”

There is also a much greater inclination for the media to report on the economic inequality aspect of scandals like this, and the view of workers. For the best example of this, see Michael Cropp’s ANZ staff outraged at boss’s expenses, says union. This reports that “ANZ staff are said to be outraged by their chief executive’s luxury lifestyle while they’ve struggled for a pay rise… First Union general secretary Dennis Maga said Mr Hisco’s actions were especially galling when members worried about staffing levels and pay were told the bank was trying to cut costs.”

The same article also reports the analysis of Consumer NZ’s head of research Jessica Wilson, who explains how ANZ customers would view the scandal: “It indicates there was some sort of culture of excess going on, that a chief executive thought that this is what he should be entitled to as well as a very generous salary – that other expenses such as this should be covered as well.”

Furthermore, there will now be a greater suspicion of the banks: “Wilson said consumers were rightly asking questions about the banking industry’s bumper profits, why charges were so high and, now, whether that was going into banking products, or luxury pastimes. This would do little for their trust in banks, for which ANZ ranks among the worst, she said.”

Even the Institute of Directors has spoken out against the practices that ANZ directors were arguably complicit in, with general manager Felicity Caird being reported saying that “It was up to the board to make sure the chief executive’s expenses were closely and regularly scrutinised”. She also “said organisations must have clear rules for reasonable expenses, rather than what Sir John described as an oral agreement between Mr Hisco and a former chief executive.”

In explaining Hisco’s departure, John Key gave some reasons that are very much in sync with the Zeitgeist: that the elite have to be subject to the same rules as those at the bottom, and that transparency and process are of vital importance – all the type of arguments that might have been de-emphasised in the past if a company board really wanted to retain its CEO.

For example, Key said “We have got to be consistent with the standards we set, from the freshly minted teller to the CEO”, and “His departure demonstrates that when people don’t do the right thing, we hold them to account no matter the status or position in the organisation” – see the Herald’s: Health concerns and ‘delicate employment matters’ reason David Hisco departure was delayed for weeks.

Of course, Key himself is also under intense scrutiny for his role in relation to Hisco. On one level, there is increased interest in whether Key has had untoward dealings with the CEO, as seen in this article by Anne Gibson: Ex-PM John Key sold ex-ANZ NZ chief Hisco his beachfront holiday house last year.

But it’s bigger than this. As the Herald’s Liam Dann argues, “it is Key as chairman who is responsible for the issues emerging under his watch. The highly unusual nature of this departure puts more pressure on the former Prime Minister” – see: Pressure mounts on Sir John Key as ANZ turmoil grows (paywalled).

This article, and others, also draws attention to Key’s role in another recent scandal with the ANZ bank: “Last month, the Reserve Bank of New Zealand revoked ANZ Bank New Zealand’s accreditation to model its own operational risk capital requirement due to a ‘persistent failure’ to properly calculate risk. It was ordered to increase the capital it holds as a safety net to absorb possible losses, by 60 per cent to $760 million. That prompted former BNZ chairman Kerry McDonald to write to Reserve Bank governor Adrian Orr, saying he was ‘amazed’ at the limited penalty imposed on the bank. He called for ANZ chief executive David Hisco and Key to resign.”

This issue is well explained by business journalist Rebecca Stevenson in her excellent opinion piece, Why Sir John Key won’t resign: there’s different rules for the rich and powerful.

However, I took a slightly different view on this, suggesting that Key’s elite status would mean he would attract more scrutiny than he would have in the past – see Chris Keall’s ANZ resignation call: Knighthood puts target on Sir John Key’s back: academic.

Finally, for a sense of how the new mood for questioning the status quo is filtering through to a public demand for understanding the role of banks and business elites in our democracies, see the trailer for a new movie which has its premiere in New Zealand next month: Capital in the 21st Century – Official Trailer. This film – which is a New Zealand-French production – is an adaptation of French economist Thomas Piketty’s ground-breaking book of the same name, looking at power, inequality and wealth. (And I have a small role in it too).

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz