Short term pain but long term gain with Reserve Bank announcement

On Thursday Reserve Bank Governor Alan Orr revealed what might be the biggest decisions in decades. Governor Orr, in an attempt to strengthen the banking sectors ability to handle a major financial meltdown, announced plans to make banks hold more of their profits relative to the amount of lending that they do.

Yes there is pain. But as the saying goes, you cannot have gain without the pain. So, putting that in context here are the pains (and later I will mention the gains):

  • Substantial increases in mortgage rates – possibly up to $300-400 a week if you believe A.N.Z.
  • Lending to farmers has decreased significantly on the double digit figures of a few years ago, but with an average mortgage sitting at $3.833 million for farms of all types, even a minor change would hurt
  • The total hit to banks may cost around $20 billion

No one I am sure wants New Zealand to have a spasm of collapsing financial institutions like we did in the Global Financial Crisis where 32 separate institutions imploded, wiping out billions of dollars in bank deposits and taxpayer monies. And we certainly don’t want the non-accountability that went with several of the imploding institutions where the people in charge were found to have properties worth several million dollars and living the societal high life made from ill gotten gains. The massive bangs of Fannie May, the Lehman Bros and Freddie Mac going under might not have been felt in New Zealand but anyone following the news would have certainly noticed.

And I do not think New Zealand society is prepared to be radical like Iceland, which which decided to jail its bad bankers and was the first E.U. nation to have a growing economy again post G.F.C.

However I believe that the short term pain will in the longer term be off set by gain. New Zealanders will have more confidence in the banking sector that when financial strife attacks, the banks will be able to cope. The ghosts of the 2007-2009 Global Financial Crisis will be consigned to the history books. Whereas other countries are having or have had painful reconciliation’s with their banking sectors, New Zealand and Australia did quite well – we had none of the following:

  • Britain and Ireland went through painful austerity periods
  • The United States had to introduce the Frank and Dodd legislation to prevent a repeat of 2007-09, which various Republicans have promised to repeal
  • Greece, France, Spain and other E.U. nations suffered considerable internal strife over domestic fiscal policy

And the gains that I mentioned?

  • Implosions such as South Canterbury Finance, which took out $1.6 billion of deposits, long term investments and other monies will be less likely – the little man who lost his entire savings overnight in the 2007-09 crisis has less to fear
  • Banks credit ratings will hopefully be more secure
  • Small banks such as T.S.B., S.B.S. and Co-operative Bank will potentially gain customers
  • Ultimately there will be more confidence that money will be better in a bank than under the pillow

That is the theory. The reality going forward is quite possibly different in a country without a flash record of understanding the need for a robust banking framework. The possibility that voters will vote for a party that promises to kick the can down the road for another few years is there. So is the possibility that parties beholden to the banks will vote to undermine, or worse still, completely dial the progress back to where we are today.

Questions about the banking sector after ANZ chief’s departure

In 2008 when the banking sector was reeling from the effects of 32 separate New Zealand financial companies imploding, and much larger implosions happening in the United States, there were calls for bankers to be tried for fraud and jailed. United States President Barak Obama campaigned on banking reform, which he then got Senator Elizabeth Warren to enact. Democrats and the little man applauded, but the least repentant banking corporates cried foul. The rest of the world was cautiously optimistic.

Ten years later against a linger backdrop of economic uncertainty, with many of the factors that caused the 2006-2009 meltdown, it is New Zealand’s turn to question our banking sector. With A.N.Z.’s practices under the spot light how many other banks have questionable goings on in their back offices?

I agree with Sam Stubbs, who has called for a banking sector Royal Commission of Inquiry. The extent to which Mr Hisco appears to be out of touch with the rank and file employees such as the Branch Managers, the Tellers and so forth who are the public face of A.N.Z. is quite telling. Also notable is how the Chair of A.N.Z. and former Prime Minister John Key appears to think that Mr Hisco has been properly held to account and that the penalties he has accrued are somehow sufficient considering what he has done.

Mr Key denies it has had anything to do with the dressing down that A.N.Z. was handed by the Reserve Bank for not having enough capital in May. He said that Mr Hisco would take responsibility for it if he were in a position to do so.

This idea of a major bank not having enough in capital in the event of an emergency, I think quite a few people inside and outside of A.N.Z. and indeed the banking sector would find quite troubling. It suggests to me at a quite basic level in the same way a ship at sea wants to be sure that it has enough fuel to get back to port, someone or some several people who had significant monitoring responsibilities were somehow not doing their job.

I imagine that A.N.Z. rank and file employees would be quite angry with how the matter has been handled. Yes they might not have had the same entitlements and responsibilities as Mr Hisco, but I am sure that if any of them did that they would be fired point blank and not be entitled to any financial compensation, or other supportive measures. Mr Hisco, whilst relinquishing about $6.4 million in equity will be paid a full 12 months salary, which is dramatically more than the $0 that most people get paid when they get fired.

Yes, Mr Key and his Board might think they have done the right thing in letting Mr HIsco go, and in that respect, yes they have. However the $2 million golden handshake, the fact that there might be much more than what has been let on that he misappropriated all point to a bigger story than either Mr Key was willing to tell the media about, and/or which Mr Hisco was willing to tell Mr Key and the Board of A.N.Z. about.

It is hard not to feel sorry for the ordinary staff member at A.N.Z. just trying to do their job as best as they can to the standards expected of them, who must feel like they have been ratted on from the highest echelons in the company. They surely would not have anything like what Mr Hisco got to support them in their post A.N.Z. career, which by my guess on the current estimated income for a bank teller would take them about 40-50 years to earn.


The danger of going cashless

Recently I read in that in the United States there are cities that are starting to push back against going cashless. In a backlash that some have called backwards, cities such asĀ  Philadelphia have moved to reject cashless stores.

It is possible to see why some people think cashless is great. It means less dead weight in ones wallet for starters and time is saved handling the financial transaction of a purchase more quickly if it is done using a card. Security concerns about carrying cash around, properly counting the till at the end of each night and being sure no money has been taken by employees is a justifiable second.

But I can see why there are concerns about going cashless. They range quite extensively from privacy concerns, to socio-economic status, but also vulnerability despite intensive and extensive security measures to cyber attacks/hacking. Specifically:

  • Every financial transaction using a card leaves a digital footprint. In a world where privacy concerns are becoming an increasingly potent issue, the ability of a few tech companies operating under a different set of laws to your country to mine the data stream from your card raise serious questions
  • The same digital footprint also raises significant cyber security concerns that were underlined a few years ago when a single hacking strike caused disruption across the world. With digital data theft on the rise and an apparent inertia among governments to work out how to reach a common agreement, these issues are only going to grow.
  • In America millions of people do not have the means to get a credit card or even have a bank account. Due to many possibly working jobs where payment is cash only, or having issues with credit or not having the education to know how to obtain such things, there is a risk that going cashless will create an under class of citizen.

In New Zealand, going cashless would promote similar issues. Whilst there are certainly people who do not use cash at all and managed to get by on credit, debit and EFTPOS cards, the lower echelons of society have similar problems as those in the United States. Yet, it is a distinct possibility, if you believe M.Y.O.B.

The problems in New Zealand primarily concern rural communities where banking services are often at a minimum and cash is a significant part of their financial system. A little town like Fairlie in south Canterbury might not have a bank and thus people would have to travel to Geraldine or Timaru to conduct banking business. Whilst all businesses now offer EFTPOS and most offer credit card services, despite the urgings of M.Y.O.B., I cannot see New Zealand disposing of cash as a form of money in the immediate future.

Also cash is the likely method of financial transactions among community groups. A group fundraising is not likely to have anything other than cash and what a lot of people consider to be a financial dinosaur now: the cheque book. As the treasurer of such a group in Christchurch the cheque book is often the preferred way of handing over significant money to a donee. We donate the hard cash in our account for safe keeping and then write the equivalent cheque and hand it over.

So, what do you want?

To have a completely cashless nation, at the risk of a financial under class like the United States or a country with a balanced system that is also a bit more secure against attacks on the digital system?

Learning from the Mainzeal collapse

Today several former Mainzeal company directors were ordered to pay N.Z.$36 million in a high court ruling. The ruling is the latest phase of a long running saga that started with Mainzeal going into liquidation in 2013 owing $110 million.

At the core of the problem is the fact that the boardroom directors of the company knew full well that it was in a parlous state, yet they continued to allow it to trade until it imploded. Four directors have now been ordered to pay $36 million in damages including former Prime Minister and National Party leader Jenny Shipley.

So how did Mainzeal get to this point and what lessons does it have for those in corporate positions of responsibility?

A Richard Yan was working for Mainzeal during the school holidays in 1981. In 1996, after completing a business degree, he oversaw the takeover of Mainzeal and the creation of Richina Pacific Group to manage his business assets. During the pivotal year of 2004, several things happened:

  1. Dame Jenny Shipley was asked to join
  2. Capital was extracted from the company to prop up business assets in China
  3. Mainzeal made a small profit that was wiped the following year, and then see-sawed in 2006-07

In 2009 PriceWaterhouseCooper had concerns about the solvency of Mainzeal. The following year Dame Jenny Shipley raised concerns about the worsening balance sheet. By the end of 2011 the working relationship between Mainzeal and the rest of Richina Pacific Group had deteriorated to the point that Ernst & Young were commissioned to do a governance report on Mainzeal.

And all this time fresh attempts to recapitalize Mainzeal were being attempted using various means, such as a pre-paid goods agreement, getting money back from China based assets and setting up entities in New Zealand to distract claimants.

Perhaps the death knell was a spat with Siemens in 2012 that saw them withhold payments over work upgrading the electricity links between the North and South Islands. Coupled with leaky building claims targetting Mainzeal work and the possibility Mr Yan’s wife might be made bankrupt if the company collapsed – leading Mr Yan to warn he would walk if his wife was not released from a guarantee she made to B.N.Z.

The final blow was struck when an emergency meeting in January 2013 saw a motion passed to invite B.N.Z. as the major bank involved to appoint receivers. It immediately suspended loans and shortly after the company caved in.

For years until being liquidated in 2013, it continued to trade, during which time it racked up $110 million in debt that will largely never be recovered.

The directors might have been ordered to pay $36 million, but as holders of liability insurance, it will come out of their company and not their personal pockets. Clearly not smart enough to realize that Mainzeal was in trouble, but smart enough to make sure their pockets were protected by insurance.

For me this is not good enough. If a person or company continues to trade and rack up debt despite knowing it is not in a position where it can realistically trade, then when balancing the books – or what is left of them, the creditors should be able to require the forfeiture of luxury assets to make up the difference.

Of course this would bring howls of rage from the defendants, highly expensive attempts to get the case thrown out in court and warnings of doom and gloom. With similar certainty, the allure of a directorship on a corporate board and the opportunities to make significant money would be enough to overcome the doom saying.

Historic examples of collapses make me wonder if New Zealand has learnt anything from corporate failure. Based on those examples, which include Bridgecorp in 2007 owing $490 million, Equiticorp in 1989 with $1.4 billion in assets and $550 million in debt, among others I think the answer is a resounding no. Whilst not as big, public expectations around the application of the law, the need for greater accountability and the Global Financial Crisis of 2007-2009 have all focussed the spotlight on these types of businesses in ways I think some with influence do not like.

New Zealand banks not squeaky clean; told to clean their act

An inquiry into the conduct of New Zealand’s banking sector has found widespread wrongdoing across the sector. The inquiry, which follows a damning assessment of Australia’s banking sector several months ago found that 11 banks have had instances of misconduct by staff.

In the Australian bank sector inquiry fee gouging, bribery, fraud, board level deception among other instances of misconduct had been found. The sector was left battered by a Royal Commission, though no immediate recommendations for overhauling conduct and procedures was made. That will be in February 2019.

Although the New Zealand inquiry found none of that type of severe misconduct, it did find much poor lower level behaviour. Among the failures of the banks the inquiry found that they had:

  1. Used high pressure incentives to get staff to sell products such as credit cards which a customer did not necessarily need
  2. Despite knowing they needed to be rid of them, banks had dragged their feet on ending the use of incentives
  3. Done this despite having huge profits

Notably the failings of the New Zealand banks were not found to be of the sort that were identified in the Australian banking sector inquiry, where not only was the wrong doing widespread it pointed to much bigger problems in the industry.

Still, this is not a great look for New Zealand banks and banking. Customers have a right to be disappointed that this has happened. I hope that the inappropriately charged $23.9 million is refunded where possible and that those who were identified as making the charges are sent to ethics training.

Banking like any other sector faces ethical issues from time to time and all staff, from the C.E.O. down to the person who started their first day as a teller in a branch, have ethical responsibilities that their training should identify. The majority will to the best of their ability try to do their job and remember their ethical and legal responsibilities. But as with any other industry there will be a few rotten apples who will steadfastly refuse or otherwise prove incapable of proper conduct. It is they who must be made to move on.

Iceland jailed their bankers as a result of the Global Financial Crisis in 2008. Their economy began to grow again the following year when most other countries, New Zealand included were still in recession. I am not suggesting we do anything like that if our banks fail to meet the February deadline, but I do like an earlier idea I had of requiring bank branch managers, and higher levels to be registered with the Financial Markets Authority who would have the right to strip them in instances of serious misconduct.

That I think would make all but the rotten apples stop and think about their conduct.