Report shows flaws in RBNZ's bank capital proposals

A report by Tailrisk Economics on the Reserve Bank of New Zealand’s latest 60 page attempt to explain its proposal to sharply increase bank capital, shows that the Bank’s analysis is totally unconvincing. ‘We stand by our previous assessment that the proposals will be very expensive and bring few benefits. The present value of the costs could be more than $30 billion’ said Ian Harrison principal of Tailrisk Economics.

The Bank has now released three differing papers explaining the proposals, which, in itself is a concern. A robust policy process would not have required repeated attempts at backfilling and further explanations.

The latest paper plays the ‘wider social cost’ card for the first time, but the Bank grossly misrepresents the literature it extensively quotes. ‘The World Bank and the UN did not say that banking crises have long lasting effects as the Bank claims’ Harrison explained, ‘ the clear message was that the social costs in any economic downturn are substantially mitigated in countries, which, like New Zealand, have robust social safety nets.

‘The new ‘risk tolerance framework’ is a muddled approach to setting bank capital requirements’ explained Harrison. ‘The Bank has creating a problem of its own making by finding the banking system to be ‘unsound’ and then has fabricated the ‘evidence’ to support an arbitrary decision to increase bank capital.’

Other supervisors have similar mandates to the Reserve Bank’s, but none have attempted to quantify it, and define ‘soundness’ in terms of the probability of a banking crisis. Both terms are too subjective to be useful metrics to drive policy in a mechanistic fashion.

There has been a corrosion of the quality of the Bank’s policy analysis. The analysis of the inputs into the Bank’s capital model is an embarrassment to New Zealand and undermines the Bank’s credibility. The Reserve Bank continues to ignore the critical fact that the banking system is mostly foreign owned.

On any reasonable assessment the banking system is sound. We do not need the Reserve Bank to impose large costs on the economy to ‘make New Zealand sound again’.

The report ‘Third time lucky?’ is available at tailrisk.co.nz/documents
Earlier reports, ‘The 30 Billion Dollar Whim’ and ‘Tailrisk Pinocchio’ awards are also available on that site.

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