The Governor: Grappling with the global winds of change

When Management spoke to Reserve Bank Governor, Adrian Orr, in mid-December, it had been a long year. He had moved straight into the Reserve Bank role in March 2018 without taking a break from his previous role heading up the New Zealand Superannuation Fund. 

“I am knackered, but it’s that time of the year. I keep saying to the staff, ‘breath through the nose, don’t send that email or text’.”

And it has been a big year. There is real change afoot at New Zealand’s central bank and our ‘lender of last resort’.

As Management went to press Parliament was finalising law changes that aim to give the bank responsibility for contributing to maximising sustainable employment and to move official interest rate setting decisions to a committee.  

Orr told Management in December what he is trying hard to do “is to provide a vision and sense of the outcomes we measure so we can see, over a period of time, whether we are on the right path.”

As he noted in the bank’s annual report in October the Bank is undergoing significant innovation and change in all it does, a process started before his appointment as governor. 

“The ongoing Review of the Reserve Bank Act, and more recent performance and relationship management initiatives, will ensure that there is no ‘business as usual’ for us for some time to come …”

The report noted that recent priorities have included changes to the currency operations model; digital capability, both internally and with its payment systems; relationship management and focus on prudential responsibilities along with monetary policy targets and decision-making structures. “No stone is being left unturned by these multi-year initiatives,” he wrote.

And the bank has developed a new vision. It wants to be “A Great Team, Best Central Bank.”

Does that mean best central bank in the world? 

Well, there is no point being the best central bank in New Zealand, he quips.

The challenge is to find international best practice and gravitate towards that, rather than what is common practice, he says.

As he sees it, you need a clear vision on what best practice looks like. 

This encompasses clarity of vision; clarity on what your endowments are. For the bank, in the long term, that is its liquidity, its operational independence through legislation. It’s also around its ownership structure, retaining skills and that staff are self-selecting because they want to work at the bank.

He says if you have a good sense of your endowments and vision you can be clearer on what strategies or actions you need to undertake to achieve your goals. And equally clear on what you do not need to do.

His first nine months as governor has also seen him taking the bank into new spheres.

In a speech in September 2018 called Geopolitics, New Zealand and the Winds of Change he discussed the key plague on economic society as being ‘short-termism’. 

“This is the overt focus on the next day, week, or reporting cycle. In contrast, by long-term, I mean anything that ranges from ‘outcomes’ over the next few years, through to an ‘idealised vision’ that could last inter-generationally,” he said in the speech.

He also outlined the global challenges New Zealand faces – environmental degradation; mass urbanisation; ageing populations; mass migration and unequal income and wealth distribution.

The speech stirred up a lot of interest. 

“There was an interesting reaction from people. It was quite confronting in a couple of areas. One is people get it, but don’t know how to do  something about it.” 

This is particularly true for people working for multinationals, which tend to be output-driven rather than regionally outcome-driven.

And we are very poor investors, change of the type described in the speech is seen as a cost. Others may have asked ‘what the hell is a Reserve Bank Governor doing talking about this’?

But he intends to keep raising these issues and believes New Zealand could be a world leader in addressing these global forces as “we have less to lose and more to gain”. 

“We are small and isolated with a small population, a green environment and we have 99.9 percent renewable energy. We can rely on the rest of the world paying a premium to be part of us. 

“We have rainfall, grass, food security and tourism is our number one industry.”

This all means, he says, we have an excellent opportunity to lead.

But he questions whether we have added real long term value. We have the lowest productivity in the OECD and we don’t know how to change for a weightless economy [services and products that are intangible]. 

It’s also worth remembering that “people like to hang with us”.

He recalls a French colleague who came to visit when Orr and his wife author Sue Orr, lived close to Narrow Neck Beach on Auckland’s North Shore.

“He cried, just at the raw beauty… the question is how do we grab that.”

“All day, every day we rush to the short term” and we are not alone, that is the global phenomenon of capitalism.

“Hence we need to have real consciousness and think about how to enhance things and cure these market failures – environmental, societal and a lack of diversity.”

The bank has a new Te Ao Māori strategy to help with diversity and inclusion of thought and to ensure it’s operating effectively given the growing significance of Māori economic activity within the financial landscape. 

Orr says it’s a gateway in terms of the bank’s relevance to the wider public of New Zealand.

A recent stakeholder survey found the bank is highly trusted, but people do not know what it does and that, he says, is a not very good basis for trust.

“Part of our credibility is our third-party endorsements and why we exist… people need to be confident around our operational independence and our licence to operate.”

The first part of the gateway is around this relevance with the bank describing itself as the Tane Mahuta of New Zealand’s financial system. However, he says, Ma¯ori and Pacifica communities are not at the table. 

An important part of this strategy is to make people comfortable that diversity and inclusion is critical to success.  

His speech also highlighted that 95 percent of New Zealand’s banking assets are foreign owned – an improvement as some years ago it was at 98 percent. “Kiwis are fighting back”.

Some 85 percent of the banking assets are in the four big Australian banks and once the other smaller foreign banks are accounted for this reaches 95 percent.

Asked if this is a problem – he says it’s not, but it brings specific challenges, in that if any of the big banks tip over it brings the whole New Zealand system down.

“Hence we need very well-capitalised banks here. They have to be strong and well anchored.” 

That is hard to explain to foreign owners who ask why the bank might be worried. “They can say that but if a bank fails, they might lose equity but New Zealand would have many years of economic chaos to get through. 

“We have to be standalone and highly captialised as the host regulator.”

 But it is highly politicised. The Reserve Bank has a great relationship with the Australian Prudential Regulation Authority but the Australian banks talk to Australian politicians who talk to their New Zealand counterparts.

It is, he says, never ending. 

In a November 2018 media release he explained that the most important tool “in our kit is ensuring banks hold sufficient capital to be able to absorb unanticipated events. The level of capital reflects the bank owners’ commitment – or skin in the game – to ensure they can operate in all business conditions, bringing public confidence.

“The Reserve Bank needs to ensure there is sufficient capital in the banking system to match the public’s risk tolerance. This is because it is the New Zealand public – both current and future citizens – who would bear the brunt of a banking mess.”

Internationally the standard capitalisation tends to be around 12 percent meaning banks leverage on this and hold 12c for every dollar they lend, Orr told Management.  

“Banks love to have as little capital as possible because in their mind capital costs them, relative to debt.

“Again this short termism.” While they like to have debt, it makes NZ highly vulnerable.

So is it an adversarial role?

It can be, says Orr, but he is trying to change that. “We all have the same aim – a sound, efficient, profitable system.”

The central bank has to think about the system as a whole, about society and its risk tolerance as it is society that will bear the cost (if anything goes wrong).

He says any failure would means huge social disruption. 

“It is brutal and that full cost has to be thought about, it is not about private interests.”  

 

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