I have reason to dislike Adrian Orr, but here's why I don't

Tuesday, 8 October 2019

Reserve Bank governor Adrian Orr is taking a strong stance against Aussie banks.

OPINION: Let me start by declaring a conflict.. I have a good reason to dislike Adrian Orr. He knocked me out of contention for my dream job of head of the NZ Superannuation Fund. In hindsight they made the right decision, but its very human to feel miffed by being beaten at the tape.

However, having seen recent criticisms of him, I find myself compelled to defend his actions as Reserve Bank Governor. He's no wallflower, but he is not the devil incarnate either. And he finds himself at loggerheads with the banks, who are New Zealand's most profitable companies, with the best funded lobbyists and friends.

So let's look at the criticisms of him and see if they stack up.

Sam Stubbs: 'Reserve Bank governors in New Zealand have traditionally been a passive lot.'

Adrian Orr is no wallflower, but he is not the devil incarnate, either.

* Portrait of the governor as a strongman: the complicated heroics of Adrian Orr

* Adrian Orr is locked in a deepening battle with the banks. Where will it end?**

1) He is too outspoken.

Reserve Bank governors in New Zealand have traditionally been a passive lot. None have made their name by being particularly avuncular or aggressive. Their words have been carefully chosen and interest rate changes have been predictable, with no real surprises. And that has well suited the professions who make their name by second-guessing Reserve Bank decisions ie. economists, banks and stock brokers. They get to be right in predicting Reserve Bank moves, and make money accordingly.

But there is a real downside to this management style too, and it's costing New Zealand billions. By being passive, predictable and hardly ever rocking the boat, successive Reserve Banks have allowed the Australian-owned banks to be more aggressive they would have otherwise been. Their provisioning levels are low by international standards, profits are extremely high, and the banks have been allowed to lend too much to volatile sectors, as we have just seen with rural lending.

There's also a very New Zealand attribute on display here, the tall poppy syndrome. Adrian Orr is no more outspoken than Mark Carney or Allan Greenspan, but the fact that he doesn't do things slowly, quietly or gently counts against him in a country that rewards these things in civil servants. But we need regulators with teeth, and ones that can roar, too. Different is not necessarily worse.

2) He is too unpredictable

The recent 50 basis point interest rate drop has been interpreted by some as evidence of dangerous unpredictability. But people forget it's not his decision alone. The Monetary Policy Committee decides, the word 'committee' implying more than one wise head. The fact that their rate cut was not predicted by outside observers is unfortunate for them, but says nothing about the quality of the decision made. And the fact that it scared some business leaders may have been exactly what was intended. As always, we shall see if it was the right one, but it increasingly looks like it was. Their job is not to make the professional pundits look good, it's way more important than that.

3) There is insufficient data to justify the recommendations made to increase bank capital.

This criticism is factually incorrect. Reserve Bank announcements and research papers are arcane instruments, and I don't blame ordinary New Zealanders for not reading them. But I have, and they make a compelling case for raising the capital levels to the levels the Reserve Bank recommends - that is, the 75th percentile for countries of our size. What's key here is appreciating that our banks are not big, diverse institutions operating in a large, first-world economy. We are a small country, with relatively small banks, and are very exposed to trade in a few commodities. We are a very lucky country, but a vulnerable one too, and we need to have banks ready for the shocks we could easily experience.

It's a useful exercise here to go to the motivations of interested parties. Critics of Adrian Orr want the lending to keep flowing, with no disruptions, please. Banks want to keep growing profits. So what does Adrian Orr and the Reserve Bank want? I doubt its purile point scoring or bank bashing. They are mandated to keep inflation in a range, unemployment low and the banking system safe. Why would they recommend higher bank capital unless they sincerely believed it was necessary? Raise capital too much and they slow down the economy to a point where unemployment rises, and to levels that earns Adrian Orr a 'fail' grade.

4) The rural sector will suffer if he enforces higher bank capital requirements.

Let's remember, the banks chose to make excessive loans to rural New Zealand, and were encouraged by the low levels of capital required to support that lending. And they are now threatening not to extend credit to rural New Zealand if capital provisioning is raised. But it was the banks who got us into this mess, and now they're howling because the Reserve Bank doesn't want them to repeat the mistake. The uncomfortable truth is, if Adrian Orr was in his seat a decade ago, we would have a higher chance of not being in this rural lending mess now. So let's not shoot the messenger, who is seeking to clean up decades of passive complacency. It's a brave person who calls out the emperor's new clothes for what they are.

And either way, there's a big bluff happening here. After years of helping fund the 'white gold' story, the banks are cutting back, anyway. In the Reserve Bank, and its Governor, they have a convenient scapegoat to blame for cutting back lending to farmers. But it's happening either way. And tightening credit may not last, whatever happens to bank capital requirements. The last time rural lending requirements were tightened up by the Reserve Bank, in 2012, rural lending actually rose. Remember, banks are hard-wired to lend as much as they can, that's how they make money.

5) He's too personal in his attacks of critics.

On this I think the naysayers have a point. Orr has clearly blown some valves under pressure, especially in public forums. I understand his frustration given the lack of informed debate and the overly personalised criticism of him. But he would be better advised to breathe. He operates in, and should rely on, the world of data, analysis and expert opinion, and that should do more of the talking for him.

Orr's recent questioning of John Key and Doug MacKay for holding directorships in both the New Zealand subsidiaries of Australian banks, and their parent companies, is a very valid one. Key and MacKay are heavyweights that should be welcome on any board. But in times of stress, we need to know that they will fight for the rights of New Zealand customers alone, and not have to choose between the interests of the Australian parent or Kiwi subsidiary. They cannot have a bet each way, they should double down on New Zealand.

That Orr's style is different is of little doubt. But he is a governor of substance, bringing an impressive track record of delivery to a role that needs some hard decisions made, and soon. So let's dump the emotions and let the data decide. And that data strongly points to a New Zealand where the banks make excessive profits because they have to provide too little capital for rainy days. They should make healthy profits, but have healthy rainy day funds too. Is that too much for the Reserve Bank governor to ask for?

Sam Stubbs is founder of not-for-profit KiwiSaver provider Simplicity.