Monday, May 27, 2019

The impact of regulations

The Reserve Bank has finally made official what had been discussed over the last few months. They're proposing to increase the amount of capital a private bank in NZ must hold compared to what it has loaned out (the so-called risk-weighted assets of the bank). The capital ratio is to be increased from the current 8.5% to 16%. There are other detailed requirements, but they all effectively drive towards the same objective of increased capital and hence, "safety" for the banks.

This will almost certainly result in increased mortgage payments, not to mention increased interest costs on private sector businesses, which are regarded as riskier than houses.

Former Treasury economist Michael Reddell has been studying these proposals for some time now on his Croaking Cassandra blog. He has his own list of reasons why this change is unneccessary, listed in the first of those articles.

Aside from many other problems with the NZ Reserve Bank analysis, Reddell points out that it would see NZ subsidiary banks with higher requirements than exist in Australia for many of the parent banks, which makes no sense, since any banking crisis that took them down would take the NZ ones with them.

There's also a paper he quotes, The 30 billion dollar whim, which summarises the problems with the Reserve Bank's regulatory proposals for private NZ banks increasing their capital requirements and has the following conclusions:

1. Capital increases are unnecessary. 
The banks are already sound. The costs to private borrowers could be very large. Estimates of the net present value costs in the tens of billions would not be alarmist.

2. Risk tolerance approach is actually a backward step.
Trying to quantify the risk on the basis of a metric like capital ratios is not a good way of actually dealing with risk, it just looks like it because "numbers".

3. Modelling analysis is embarrassingly bad.
They not only did very little themselves, but largely ignored the vastly greater analytical capabilities of their Aussie counterparts, APRA, who are far more experienced in these matters given the much larger market they have to regulate. APRA must be wondering what it will be like working with Orr and company if a crisis does hit.

4. Bank missed a double counting in the capital requirement.
Incredible: the Bank's analysis either missed or ignored the fact that they have already increased bank capital demands by 20 per cent by requiring advanced bank capital to be 90 percent of that required under the standardised approach.

5. Impact of foreign ownership continues to be ignored.
There is little point in a subsidiary having a higher capital ratio than its parent; and the cost to New Zealand of increased profits going to foreign owners.

6. Economic cost of a banking crisis is substantially overstated.
The Bank’s estimate is that it would whack about 63 percent of GDP. A more realistic assessment of the marginal cost of a banking crisis, for New Zealand as opposed to the underlying economic shock, would be no more than 10 percent of GDP.

7. Misrepresentation of the social costs of crises.
The Bank has grossly misrepresented the literature it extensively quoted from, on the social costs and longevity of banking crises. The World Bank and the UN did not say that financial crisis have long lasting effects as the Bank claimed. The relevant message from the papers the Bank quoted from is that the social costs in any economic downturn are substantially mitigated in countries, which, like New Zealand, have robust social safety nets. We found no evidence of long lasting ‘wider social costs’ in some relevant New Zealand data. Suicide rates, divorce rates and crime rates did not deteriorate during the GFC recession.

8. Fiscal risks benefits overstated.
Higher capital may not reduce governments’ gross fiscal costs at all if a government feels obliged to top up a banks’ capital to the new higher level after a crisis. Anything less could mean the banking system would continue to be ‘unsound’.

So basically there will be a whole lot of extra cost caused by regulation with no measurable increase in safety. Sounds typical.

In fact it might even reduce that safety factor across the whole economy because any extra money paid in interest is money not being used to reduce private exposure to debt, which means borrowers are more exposed in the next recession.

I don't think the existing government has the intellectual grunt to deal with this and may simply take the word of Orr and company as gospel. However, extra interest payments will also reduce the amount of tax paid to the government, so that may get their attention.

8 comments:

Adolf Fiinkensein said...

Bring back Don Brash!

Roj Blake said...

What has happened to Tom Hunter? He arrived here with a hiss and a roar, expounding on all things America, needling Egbut with tales of his NY Cop daddy, repeating the daily talking points from Trumpistan.

And now? Reduced to copy and paste from someone else's blog. The well has dried up, his steam has evaporated, the daily memos from Moscow Center have ceased.

Whither now, Tom Hunter?




Adolf Fiinkensein said...

Wither now, Roj Blake!

Tom Hunter said...

David in a comment about me here on May 14:
Chunter clings to his rapist, thief, criminal, wife beater, adulterer-in chief as he sees a mirror image of himself in Trump.

Roj in a comment about me over on The Inquiring Mind blog:
Trump is a lying, thieving, raping, wife beating, thug. I am still wondering which of these attributes most attract [Hunter] to Trump

Chuckle! For you oldies I provide the following explanation of this strangel, hive-mind behaviour, Non-Player Character (NPC):

NPC behavior in computer games is usually scripted and automatic, triggered by certain actions or dialogue with the player characters.

Hopefully when (if) David returns he'll have been upgraded to branching dialogue algorithms. For Roj it appears there's no hope.

Lord Egbut Nobacon said...

Why on earth do you take someone else's OPINION and regurgitate it like Moses with the ten commandments.

It is an OPINION....probably wrong but I'm not an international banker..which rhymes with snivelling centrist wanker....now where did I read that.

Tom Hunter said...

You or Roj could have clicked on those links and had a read of them, where you would have discovered that the conclusions I copied came not from Reddell but Harrison's company, which is an economics consulting company in Wellington. Both Reddell and Harrison are economists who have dealt with bank regulation. It seems sensible to link to and quote them.

You and Roj would also have seen that Reddell in fact has a somewhat different set of conclusions, though there is some cross-over. Moreover you would have seen that I re-wrote most of Harrison's explanations to make it a little clearer for a non-technical audience. Hardly a cut and paste job then, which would only be true if I had done that for most of either Reddell's articles or Harrison's analytical paper.

And I then added my own take on this issue, making points they did not. So while it is my opinion, it is one supported by links to people who are qualified, and this all adds up to an argument. I've long realised that you don't know the difference.

And frankly it's an argument that I was hoping might draw some intelligent additional analysis, perhaps pointing out aspects not thought of, or novel aguments for or against the proposal.

But of course, as usual, you're more interested in sniping about things that are off-topic, in the hope of drawing the debate away from that of the article and thread and starting yet another stupid and pointless fight.

The very definition of a troll, although that may be a little unfair since you obviously had no ability to contribute anything on this topic.

Lord Egbut Nobacon said...

Whatever......

Tom Hunter said...

The other aspect to what I write is that I want to link to and quote from the likes of bloggers like Reddell and his Croaking Cassandra blog as an alternative to the MSM, since most such specialist blogs provide a deeper and far superior analysis of stories and events than the click-bait morons of the MSM.