'Nothing's too big to fail', warns Reserve Bank governor Adrian Orr

Tuesday, 27 August 2019

Reserve Bank governor Adrian Orr aimed another shot at the big four Australian-owned banks, warning that none of them were too big to fail. 

'There's always been a concept: too big to close,' Orr said.

'[But] Nothing's too big to fail'.

Orr also warned that if one of the big four banks were to close, it would bring the other three down with it. 

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'…If any one of those closed it would bring the rest down,' he said.

Orr made the remarks in an interview with the Australian Financial Review at Jackson Hole, during the annual meeting of the world's central bankers.

The stability of New Zealand's big four Australian-owned banks has been a contentious issue for him.

The Reserve Bank has proposed to radically increase the amount of capital the banks have to hold relative to the lending they do.

It estimates this could cost up to 70 per cent of bank profits over the next five years, or $20 billion.

The banks have said this could have drastic consequences on the sector, including raising the cost of lending, which would be passed on to lenders and borrowers. 

Orr also used the interview to call for more fiscal stimulus in New Zealand and Australia.

With central banks in both countries cutting interest rates to prop up the economy, the focus has now shifted to what Governments can do. 

Orr said that while there had been much talk of low interest rates, there had not yet been substantive discussion of a fiscal policy.

'What didn't I hear? Very little if no discussion around the role of fiscal policy,' Orr said. 

'…This is a time for the other significant lever of economic management to be doing its job, particularly when there are such obvious jobs to be done around the infrastructure deficits, the skills that are needed, health, welfare, demographics, ageing,' he said. 

He noted that New Zealand and Australia both had relatively low debt-to-GDP ratios, which gives the countries more room to borrow in the interest of stimulating the economy.