Motion agreed to., Reserve Bank of New Zealand Amendment Bill

I move, That the Reserve Bank of New Zealand Amendment Bill be now read a second time. This bill makes some changes to the corporate governance arrangements for the Reserve Bank and to the financial system oversight provisions administered by the bank. Part III of the principal Act deals with the Government’s arrangements for the Reserve Bank. The proposed changes to Part III arise from the review of monetary policy conducted in 2001, and implement the Government’s decisions arising from that review. The most significant change is the removal of the governor as chairperson of the Reserve Bank board and his or her replacement by a non-executive chairperson. The bill provides that the fellow non-executive directors elect the chairperson. That change brings the Reserve Bank into line with standard governance procedures. Other significant changes comprise the removal of the deputy governor from the board, and requiring the board to publish an annual report setting out its assessment of the performance of the governor and the bank. The amendments are designed to give prominence and focus to the board’s role, and to strengthen the directors’ accountability for the performance of their duties.

Part IV of the principal Act regulates the use of the words “bank”, “banker”, and “banking”. That part of the principal Act has the objective of preventing entities that are not registered banks from passing themselves off as such, and thereby misleading the public as to their nature and financial standing. The current wording of the restrictions on the use of bank names is too narrow, and the scope of the exemption to the restrictions is too wide. The result is that it is relatively easy for entities that are not registered banks to use names that suggest they are banks, or to use the restricted words in advertising in a manner that could give the impression they are registered banks.

Part V of the principal Act deals with the registration of banks, the supervision of banks, and the management of potential or actual bank failures. The objective of that part of the principal Act is to promote the maintenance of a sound and efficient financial system, so as to avoid the significant damage to the financial system that could result from the collapse of a registered bank. A new Part VB inserted by clause 42 of the bill clarifies and makes explicit the Reserve Bank’s oversight interest and responsibility in relation to the payment system in New Zealand. An effective payment system is crucial to the maintenance of a sound financial system, and at present the Reserve Bank has no formal responsibility in that area. The bank’s oversight has been conducted informally.

The bill was reported back from the Finance and Expenditure Committee, which considered a number of submissions and recommended some amendments, including the addition of a new part to the bill. I want to record my thanks to the committee for the valuable work it has done on the bill—of course, assisted in this case by the expert advice of the former Reserve Bank governor! That is an unusual situation on this kind of legislation.

💬 Lindsay Tisch: We need the help.

As long as he remembers that role, the member will do very well.

The submissions received by the committee focused almost entirely on the proposed amendments to Part IV that deal with the use of bank names. The bill as originally drafted provided that financial institutions that are not registered banks could not use trademarks that contained the words “bank”, “banking”, or “banker”. Credit unions, in particular, argued they should be allowed to continue to use such trademarks, as the services they provide are banking services. The committee was sympathetic to that wish, but was also concerned that the proposed provisions allowed less reputable financial institutions to use the restricted words in advertising in a manner that could mislead the public. The committee amended the bill to allow all financial institutions to use the restricted words in advertising, whether as a trademark or in a descriptive statement, provided the advertising material also contains a reasonably prominent statement that the financial institution is not a registered bank.

A new Part VC was added to the bill by the Finance and Expenditure Committee at my request, to deal with designated payment systems. Payment systems provide a mechanism for the transfer of funds between parties—usually banks and other financial institutions. Currently there is a possibility that settlements through a payment system could be unwound if one of the participants becomes insolvent. The new Part VC will provide legal certainty for payments made through designated payment systems, and it will reduce the potential for disruption in those systems. The provisions are designed to cater for a wide variety of different payment systems. The CLS Bank International operates a payment system for the settlement of foreign exchange transactions, and once the new legislation is passed the New Zealand dollar will be eligible for inclusion in that bank’s continuous linked settlement system. That will substantially reduce the foreign exchange settlement risk for New Zealand banks. Designation will be voluntary, and payment systems may choose to operate without being designated. Applications for designation will be made to the Reserve Bank, and designations will be effected by Order in Council on the advice of the Minister, acting in accordance with a recommendation from the Reserve Bank.

The committee also made a number of other amendments to the bill that did not change its substance, but were designed to improve drafting clarity. Supplementary Order Paper 99 has been released and circulated to members. The Supplementary Order Paper proposes minor amendments in order to tidy up and clarify matters in the bill.

It is important, I think, to note the bill does not alter the fundamental provisions of the Reserve Bank Act. This bill improves the Reserve Bank’s ability to carry out its functions in both the monetary policy and banking supervision areas, and formally extends the role of the Reserve Bank into the oversight of the payment system. It is, I think, only the second significant amendment to the 1989 Act that has been made since its passage; the other dealt with the issue of prudential supervision changes. It is, of course, possible that with the IMF coming out to review New Zealand’s financial system oversight mechanisms, recommendations will arise out of that review that may lead to further legislation down the track. But I emphasise that in terms of the key features of the Reserve Bank, which are related to its single focus and its independence from Government control, this bill does not entrench upon those matters at all.

I am glad to speak in favour of this bill. It was, in fact, introduced into Parliament while I was still the bank’s governor, by a narrow margin. I supported it then, and I support it now. It continues a tradition in this House—running back at least 14 years—of cross-party support for Reserve Bank legislation. The 1989 Reserve Bank bill was introduced by the then Labour Government, and was supported without dissent in the House. It is fair to note that Sir Robert Muldoon was in hospital at the time!

The bill does four main things, as the Minister has pointed out. Firstly, it gives the Reserve Bank a few more powers to deal with a bank distress situation, and those changes are entirely uncontroversial. Secondly, it gives the bank a few more powers to prevent unscrupulous parties from misusing the words “bank”, “banker”, and “banking”. The bill, as amended by the Finance and Expenditure Committee, deals with that situation in an entirely appropriate way. Thirdly, the bill changes the Reserve Bank governance arrangements, in the way described by the Minister.

As the Minister said, that change is a result of the recommendations of Professor Lars Svensson in his report of February 2001. That review found that, with the exception of about 18 months from mid-1997 to early 1999, the Reserve Bank had done a good job in running monetary policy—and modesty prevents my quoting too extensively from Professor Svensson’s report. Certainly, he felt that monetary policy in New Zealand was “currently entirely consistent with the best international practice of flexible inflation targeting, with a medium-term inflation target that avoids unnecessary variability in output, interest rates, and the exchange rate.” That is a pleasing outcome.

But Professor Svensson did suggest, as the Minister notes, some changes in the Reserve Bank’s governance arrangements, and more particularly the removal of the deputy governor from the board and the removal of the governor from the role of chair of the board. I am bound to say that I am not entirely comfortable with removing the deputy governor from the board. I feel uneasy about that, in that it leaves the board somewhat vulnerable to having only a single channel of communication from the institution to the board. If the governor were unscrupulous, it would reduce the prospects of the board discovering that until it was too late. Nevertheless, I accept that the majority view of those looking at the report was in favour of removing the deputy governor, and I will certainly not make an issue of that.

I support the removal of the governor from the role of chair of the board. I think that in all other central banks, the governor of the central bank also chairs the board.

Sitting suspended from 6 p.m. to 7.30 p.m.

Before the dinner break I was pointing out that one of the four things the bill does is to change the governance arrangements for the Reserve Bank. It removes the deputy governor from the board of the bank, and I mentioned that I was not entirely happy with that. The disadvantage of doing so is that the board of the bank has only a single means of communication from the institution to the board. In my view, that leaves the board somewhat vulnerable if the governor himself or herself has a less than straightforward way of dealing with the board. But that is not an issue on which I would wish to oppose the bill.

The other major change in the governance arrangements for the bank involves removing the governor from the role of chair of the board. In every other reserve bank and central bank that I am aware of, the governor is the chairperson of the board. So it is not surprising, perhaps, that when the 1989 Act was put through, the governor was left in the chair. But the New Zealand Reserve Bank has an unusual governance arrangement. In fact, the governor has all the decision-making authority in the bank. The board has no decision-making authority in the bank, certainly not in respect of monetary policy. The board’s function is to monitor the performance of the governor. It is, indeed, somewhat odd that in those circumstances we have left the governor in the chair. It makes for a rather uncomfortable structure. Indeed, between 1989 and the present time, the bank has tried to deal with that by creating a committee of the non-executive directors, who in turn elect a chair, and that person has acted as a quasi-chairperson of the board in terms of monitoring the governor’s performance. So I strongly support that change. It is worthwhile, and one that should have been unnecessary had we got the 1989 legislation right originally.

The fourth point dealt with by this legislation, as mentioned by the Minister, is the establishment of designated payment systems, designated clearing systems, designed effectively to enable the New Zealand dollar to enter what is called CLS Bank International, as mentioned by the Minister. “CLS” is an acronym for continuous linked settlement. In 1974, almost 30 years ago, a bank called Herstatt Bank in Germany collapsed, and that made the world aware of what has become known as Herstatt risk. It is to deal with Herstatt risk that this bill provides for designated payment systems.

Herstatt risk is the risk that arises in the settlement of foreign exchange transactions across time zones. For example, if a New Zealand bank buys US dollars from a bank in New York, it has to credit the correspondent bank of that New York bank in New Zealand with New Zealand dollars, and it does that, of course, in New Zealand trading hours. It may not receive the US dollars that it is buying for 6, 8, 10, or 12 hours’ time, when the New York banking system opens for business. Should the New York bank collapse between the time the New Zealand bank pays out New Zealand dollars and receives US dollars, the New Zealand bank is very vulnerable, indeed, to that exposure. It is not a minor exposure, as banks have tended to assume, but a very major exposure, and for the last 29 years the central banks of the world, and the banks of the world also, have grappled with dealing with that particular issue. In the end, they created CLS Bank International, which, effectively, enables foreign exchange transactions across time zones to be dealt with with minimal risk, because it enables currencies to be exchanged in real time, rather than with the long time gap that is involved in the present structure.

When I was governor of the bank, I tried to get the New Zealand dollar into CLS Bank International. CLS Bank International has been operating now for about 12 or 18 months. It now has the US dollar, the yen, sterling, the euro, and the Australian dollar in it, but not the New Zealand dollar. It has not got the New Zealand dollar precisely because, until this bill is passed, it is not possible for New Zealand to meet the conditions required by membership of CLS Bank International.

I strongly support all aspects of the bill, including that rather technical issue to significantly reduce the risk to the New Zealand banking system that is inherent in the current arrangements for settling foreign exchange transactions.

I guess it is probably unique in the history of democracy, and probably in the history of the Western World, for me to follow a speaker on the Reserve Bank of New Zealand Amendment Bill who was himself the former Governor of the Reserve Bank. I am not sure whether he was the gamekeeper or the poacher, so I am not sure which way around the analogy should work. However, for the sake of this debate, we will now assume that he has become a gamekeeper. I have some trepidation in following such an expert in these matters; nevertheless, as one would expect, I intend to have my two bob’s worth as well on this particular bill.

Essentially, the bill updates the prudential oversight functions of the Reserve Bank in line with best international practice. Although the Reserve Bank is well known as the organisation that sets the official cash interest rate at quarterly or 6-monthly intervals, the importance of the bank’s less prominent role in relation to the prudential oversight of our whole banking system cannot be overestimated. Banking represents a core service to all New Zealand families, individuals, farms, and businesses. Day in and day out, we rely on banks to transact millions of financial payments and receipts, both within New Zealand and with the rest of the world. In such circumstances, the failure of a bank would have devastating consequences, especially for its depositors.

When one thinks about it, bank deposits and the sometimes quite significant credit balances held in cheque accounts, represent an extraordinary act of faith for thousands of New Zealanders in the stability and longevity of their bank of choice. No formal security is held for those deposits, so in the event of bankruptcy or failure, customers end up amongst the unsecured creditors, with the possibility of losses running into hundreds of millions, or billions, of dollars, depending on the size of the bank concerned. One can argue that the risk for New Zealanders has increased rather than decreased because—with the exception of Kiwibank and the Taranaki savings bank—both relatively small banks, all New Zealand banks are overseas owned. That increases the risk for New Zealand depositors because of the inbuilt tendency those banks would have, in the event of a failure or potential failure, to favour their home base over their overseas-based operations.

As a country, we can never afford to become complacent about those issues. The reality is that the institution that stands between New Zealand depositors and cheque account holders, and the possibility of massive financial failure, is the Reserve Bank of New Zealand. That reality demands that the Reserve Bank remains diligent and unswerving in carrying out its functions of prudential supervision with skill and dedication. The bank must never drift to a position where it becomes reactive; it must always be proactive in identifying problems and taking corrective action in advance to minimise potential risk. In that regard, I am satisfied that under its present governor our bank does a great job. This bill will provide it both with a greater range of tools in the tool box and improve governance and other procedures, with a view to preventing the unthinkable—namely, the collapse of one of our major banks.

One of the other issues the select committee grappled with was the use of the words “bank” “banking” or “banker” by non-bank financial institutions. The original bill—the bill that came through the first reading to the select committee—wanted to outlaw the use of those words by anyone other than a registered bank. However, in the select committee it became clear to me that that would be robbing building societies and credit unions of the specific trademarks they have built up—in some cases over many years—as part of their brand promotion in the marketplace.

When we think about it, such trademarks represent private property and can be immensely valuable. The famous one I always think of is the shell used worldwide by the giant oil company of that name. The value of the brand in that case would be in the billions of dollars category. I give that example simply to illustrate the principle that it would be wrong to strip building societies and credit unions of their brand names and trademarks without full and fair financial compensation. I am pleased, therefore, that in the select committee we were able to modify the bill to allow the use of such trademarks, etc., to continue.

Building societies and credit unions are an important part of the New Zealand financial fabric, and I hope they will thrive and attract additional business in the years ahead. They are Kiwi-owned, grass roots, close to their customer base, and therefore often offer a range of innovative financial services, loans, and the like to families and others in a positive fashion. United Future values and appreciates their role in that regard.

With those few words, I have pleasure in signalling United Future’s support for this bill at its second reading.

As I speak to the Reserve Bank of New Zealand Amendment Bill, I note the recommendations in the 2001 Independent Review of the Operation of Monetary Policy in New Zealand by Professor Lars Svensson regarding the management of the Reserve Bank. As mentioned earlier, those recommendations were that the governor be removed from the position of chairperson of the board of directors, and also that the deputy-governor be removed from the board. I note that the balance between the board’s independence and its access to the information necessary to enable effective monitoring can be best achieved by retaining the governor on the board.

Another recommendation was to require the board’s chairperson to be a non-executive director. An independent chairperson is important to the maintenance of a credible and unbiased system of accountability for the bank and the governor. Another recommendation of note was to require the board to report annually on the performance of the bank and the governor. That, it was said, would raise the visibility of the board and strengthen the accountability of the bank. New Zealand First will support any legislation that promotes accountability. We believe in accountability in Government, and in that respect this bill is no different.

Subsequent to the introduction of this bill, I sat on the Finance and Expenditure Committee, and I am glad that a further amendment was proposed to the legislation. The effect of the bill is to widen the restriction on the use of the words “bank”, “banker”, and “banking” to ensure that non-registered banks do not use trademarks in a way that suggests that they are banks. I and the other members of the committee listened to a large number of submissions surrounding the proposed word restrictions. Non-bank financial services, such as credit unions and building societies, argued that it would damage their businesses, as legally they can, and do, offer banking services, including mortgages, loans, Eftpos cards, Internet and phone banking, cheques, and credit services.

It is understandable that Parliament might be concerned that suppliers of banking services that are not registered banks could be using those words indiscriminately and misrepresenting their status. However, the legislation should not prevent such providers from effectively advertising their services. For New Zealand First to vote for this bill, the recommendation that the bill recognise that the terms “bank”, “banker”, and “banking” described the services provided by a variety of non-registered financial services, had to be taken on board, and I am glad it was taken on board. I also note that a disclaimer is required when such a provider uses one of the terms in its advertising, to ensure that the consumer is aware that the provider is not a registered bank.

While we are on the subject of banks, I want to acknowledge the incredible work done by credit unions in our economy, and the specific services they provide. I was a member of a credit union for a long time, and I felt it did a great job. I think we can see that we have had far more problems and complaints in respect of banks than we have ever had with credit unions or building societies. They do a great job in this country and in our economy.

The question that needs to be asked is whether other amendments to this bill strengthen the powers of the Reserve Bank to register banks and supervise registered banks. Other amendments are to allow the Bank to consider extra information when registering banks; to improve the Bank’s powers to investigate and direct banks in financial difficulties or failing to meet disclosure requirements; to improve supervisors’ abilities to obtain information, and to improve the Bank’s ability to deal with bank failure. They also update offence and penalty provisions.

I close by saying that New Zealand First supports this bill. As always, we support good legislation and oppose bad legislation. This is good legislation.

Briefly, this is a good bill. It will improve the Reserve Bank’s ability to carry out its functions in both the monetary policy and banking supervision areas. It does not alter the objective of monetary policy, which remains the key area of promoting price stability. The changes will strengthen the board’s role in monitoring the performance of the governor and further enhance the Reserve Bank’s accountability and independence.

Previous speakers touched on the significant changes this bill proposes. One of those changes, which the previous speaker covered to some extent, is the removal of the deputy-governor from the board, and the requirement that the board publish an annual report setting out its assessment of the performance of the governor and the Reserve Bank. Those amendments have been through the select committee process, and are designed to give more prominence and focus to the board’s role, and to strengthen the accountability of the governor in the performance of his or her duties. All of that will contribute to improving the performance of the governor, the directors, and the Bank itself. It is a very good bill, and I am very happy to speak in support of it. I commend it to the House.

We have a remarkable occurrence here in Parliament tonight, because, as I read the situation, every political party is voting—

Dr the Hon Lockwood Smith: Are you sure the Greens will?

Absolutely the Greens will. Rod Donald has come on in leaps and bounds in the Finance and Expenditure Committee, under the careful tutelage of Dr Don Brash. Here we have a remarkable circumstance under MMP where every political party in this House supports this amendment to the Reserve Bank of New Zealand Act. For members like Craig McNair, who were not born when the original legislation went through this House, I tell them that at the time, and for some years subsequent, the Reserve Bank of New Zealand Act was a hot and highly controversial piece of legislation. It took away politicians’ power to play with the money system in New Zealand for their electoral advantage, and it took it across to an independent Reserve Bank governor. Of course, the politicians in Parliament—the Minister of Finance—could always direct the Governor of the Reserve Bank to loosen monetary policy.

💬 John Carter: Never!

The Minister could. All the Minister needed to do was write a note. At the time, inflation was running at 13 percent per year, although I cannot remember exactly. So people’s savings were worth less, and the dollars they had in their back pockets were becoming fewer and fewer. But well-off property developers liked that inflationary environment because it favoured them at the expense of savers.

The Government and the Governor of the Reserve Bank tamed inflation in New Zealand, and that is one of the most dramatic post-war financial achievements anywhere in the world. The inflation rate was 10 to 14 percent—and highly erratic it was —and we got it down to the 0 to 2 percent band. Every political ill, social and economic problem, and business that did not succeed particularly well was sheeted home to the Reserve Bank of New Zealand Act, and, in particular, to the Governor of the Reserve Bank for being heartless, uncaring, and unkind.

There were politicians—[Interruption] I am explaining this to Craig McNair because he was not born when that was going on. There were politicians in this House who took the opportunity to lambaste the Reserve Bank of New Zealand Act, lambaste the Governor of the Reserve Bank, and lambaste the Minister of Finance for the loony idea that the purpose of monetary policy was price stability, so that when one went to bed at night with a dollar in one’s pocket and one woke up in the morning with that same dollar, it could still buy a dollar’s worth of goods and services in New Zealand.

💬 John Key: In your pyjama pocket.

That is where I keep my savings. It is hard to imagine now how controversial that proposition was. There was one man in New Zealand travelling the highways and byways—down every rural lane, to the commercial hearts of the cities of New Zealand, to the rotaries, to the farming groups, and to the women’s groups—explaining the importance of a monetary policy that was sane, rational, and stable, and the benefits that would deliver to New Zealand, not just to business New Zealand but also to household New Zealand, not just to the rich, but also to the poor, not just to the working but also, and especially, to the retired, because the retired—

💬 Hon Taito Phillip Field: What’s that got to do with the bill?

Mr Field asks what that has to do with the bill. When he spoke earlier, it is very clear that all he did was read the notes that Heather Simpson had prepared for him, but had not read the bill for himself. It has everything to do with the bill, because that one man, Dr Donald Brash, Governor of the Reserve Bank from 1989 to last year—

💬 John Key: Sounds like a eulogy.

It is a eulogy for his career as Governor of the Reserve Bank, and it is a welcoming of him to this great Parliament. Taking New Zealand from the 1970s, where inflation was accepted, to a new position was a huge achievement. Muldoon used to blame the unions. Nothing has changed—Winston Peters blames the immigrants for causing inflation. Jim Anderton used to blame big business for causing inflation. But the cause of inflation was, always and everywhere, politicians operating sloppy monetary policy, and with the Reserve Bank, the governor, and successive Governments committed to sound monetary policy—[Interruption] Phillip Field is calling out. He cannot spell monetary policy, let alone understand it, and if the man sat there and listened he would learn something.

We come to a time in this House when there is multiparty agreement on the Reserve Bank of New Zealand Act and on monetary policy. We can change Governments and move from first past the post to MMP, and still maintain a sound currency for New Zealanders.

💬 Hon Taito Phillip Field: Thanks to the Labour Government.

I would love to thank the Labour Government for the Reserve Bank of New Zealand Act, because it was a Labour Government that passed it. I know that Phillip Field is a great admirer of Sir Roger Douglas and the Hon Richard Prebble, who drove that through, and of Ruth Richardson, who stuck to it through the hard years, but I do not remember Phillip Field, at the time, going around the highways and byways of New Zealand and explaining the significance of a sound dollar. Not at all! But we got there.

💬 David Benson-Pope: Tell us about Fiji.

After all those hard years, we have got to a situation in New Zealand in which even David Benson-Pope supports the Reserve Bank of New Zealand Act, sound monetary policy, a single objective for the Reserve Bank, and inflation targeting. If he had any sense of what it is to be an adult, he would stand up in the House and offer his sincerest apologies to Dr Don Brash and admit he was wrong for all those years, and to Ruth Richardson, because she stuck to the course and said that the Government should get inflation and Government spending down, and he would offer his thanks to Sir Roger Douglas and Richard Prebble for having the strength of political purpose in a time of high inflation to put in place the very legislative framework that could give us the best monetary policy in the world.

I am not holding my breath for Mr David Benson-Pope to do that. I will say that it is enough for members on this side of the House that he supports sensible legislation like this, and after all these years, even Mr Benson-Pope has come around to supporting the Reserve Bank of New Zealand Act and good monetary policy, and the good work of Dr Don Brash as the first governor of the new regime that has achieved so much for New Zealand. I thank Mr David Benson-Pope for his support, although I realise that, given his politics, he cannot say that himself.

I wish to speak in support of the second reading of the Reserve Bank of New Zealand Amendment Bill. Although I was not on the Finance and Expenditure Committee, I have been reading the report and I was very disappointed with Mr Hide’s speech, because he did not really talk about the bill. He talked about personalities, which was disappointing, particularly as the select committee had added a new part to the bill and there was a great opportunity to explain to the House what had been added and why. I was rather disappointed that, as a member of that committee, he did not go into the details of the changes made.

💬 Rodney Hide: I wasn’t there.

He has just said that he was not there, which is probably why he spoke about personalities rather than the bill. I support the Reserve Bank of New Zealand Amendment Bill.

As tonight we debate this bill, it is fair to reflect on the remarkable political achievement that this bill, and the principal Act that it amends, represents. I am one of the few members of this Parliament who were here in this very House in 1985 when inflation was running at 15 to 16 percent. I was here in 1987—

💬 Hon Pete Hodgson: Did you vote for it?

Dr the Hon LOCKWOOD SMITH: Yes, I did. I was here in June 1987 when inflation hit 18.9 percent. Admittedly, GST had just been brought in, and that added, perhaps unfairly, to the level of inflation. But what was happening then was that the wealth of ordinary New Zealanders was being eroded week by week—almost day by day—when there was that level of inflation. That had to change, and in many ways New Zealand led the world with central bank legislation, the only focus of which was controlling inflation. It is fair to say that the Labour Party introduced the Reserve Bank of New Zealand Act in 1989—

💬 Rodney Hide: It was a different Labour Party.

Dr the Hon LOCKWOOD SMITH: —and it is true, as my good friend Rodney Hide points out, that it was a different Labour Party. One could well question in this Parliament today whether, had this legislation not been in place today, this Labour Party on the benches opposite would have had the economic vision to have introduced this kind of legislation—the original Reserve Bank of New Zealand Act of 1989. Would it have been prepared to do that today? Not on your life! This Prime Minister is driven by opinion polls and focus groups, and focus groups would not have indicated that New Zealand should bring in world-leading legislation to give the central bank of this country that single focus of controlling inflation. It was interesting that not long after this legislation came in the National Party was elected to govern this country. During difficult times we maintained the focus of the Reserve Bank on that primary target of controlling inflation. I think it is fair to say that in the early days the inflation target for the governor, that outstanding New Zealander and world-renowned, in fact, central bank governor, Don Brash, had a target of 0 to 2 percent.

💬 Rodney Hide: Unlike that third-rate history professor that they have got as finance Minister now.

Dr the Hon LOCKWOOD SMITH: I will not comment on what Mr Hide just said. I do not have to; I think that history speaks for itself. But towards the end of our term in office we extended that range—the policy agreement’s target for controlling inflation—to a 0 to 3 percent range.

It was interesting that following the 1999 election—and I do not know exactly what was going on behind those closed doors—the new Labour-Alliance Government commissioned a review of the Reserve Bank of New Zealand Act. It commissioned another internationally renowned expert, Lars Svensson, to do a review of the operation of monetary policy in New Zealand. It was fascinating that despite the bit of agitation going on within that Labour-Alliance Government—which may have been driven more by Jim Anderton of the Alliance or the extreme left; I do not know—against the Reserve Bank of New Zealand Act, the Government commissioned this review. What did Lars Svensson say in his report? He said that monetary policy in New Zealand was currently entirely consistent with the best international practice of flexible inflation targeting, with a medium-term inflation target that avoided unnecessary variability in output, interest rates, and the exchange rate.

That is not a bad commendation of the operation of monetary policy in New Zealand, headed by my colleague Don Brash. One could hardly get a better report. In fact, Lars Svensson recommended that maybe the target should have been amended to provide a specific medium-term target of 1.5 percent instead of the range of 0 to 3 percent. To make it absolutely specific over the medium term, the target should have been 1.5 percent. Anyhow, in the final analysis, this Labour Government changed the policy targets agreement to shift the target to 1 to 3 percent. It could be argued in many ways that that was a victory for what had been carried on in this country since 1989, because there is not a huge difference between the ranges of 0 to 3 and 1 to 3 percent. So this legislation that we will pass tonight does not change any of the fundamentals of monetary policy in this country, and that is hugely important.

I certainly take pride in the fact that my colleague Don Brash was the Governor of the Reserve Bank right through that period. They were difficult times. Being governor today is not such a difficult thing because inflationary expectations are way down. Inflationary expectations in the mid-1980s were such that business people expected in the next year that the dollar would be 15 percent less than it was in the current year. Consumers expected prices to be 15 percent higher than they were in the current year. There is a huge difference today. People do not expect that today, and one of the greatest challenges in monetary policy is countering those expectations. I salute Don Brash for having the courage to stick to an extraordinarily difficult challenge through the late 1980s and the 1990s, to make sure that New Zealand’s inflationary expectations were brought down to a level by which those involved in productive industries in this country—as compared with speculation—could start to prosper.

This legislation changes some of the governance arrangements for the Reserve Bank, and we totally support those changes. I am sure that the former governor has already told the House tonight that he supports the fact that the governor should not be the chairperson of the board of directors and that the deputy-governor should not be on the board. That has already been covered this evening, and we are all totally supportive of that. As my friend Rodney Hide has mentioned, it is quite remarkable to have such consistency of opinion in this Parliament.

In my remaining minutes, I want to point out that this legislation as it came into this Parliament showed one of the failings of this Labour-Progressive—what is it called—New Zealand coalition—

💬 Rodney Hide: Labour-Progressive-Green.

Dr the Hon LOCKWOOD SMITH: No, the Greens are sitting on the wrong side for that, I tell Mr Hide. I think it is the Labour-Progressive coalition, or something. As it introduced this bill, it sought to control the credit unions in this country, and the building societies. This Government cannot help itself; it wants to control everything. It is bringing in more and more regulation into this country’s economy, and it is bringing more and more taxation by stealth into this economy. More and more it is trying to control what happens in this economy, and I detest that with a passion. I stand for economic freedom and liberty in this country.

With this legislation the Government tried to stop credit unions and building societies from being able to talk about the fact that they were involved in banking. If we look at this bill, we see that what was brought in when Labour introduced it was a restriction on the use of the words “bank”, “banker”, and “banking”. That was the main controversy the Finance and Expenditure Committee had to sort out. Finally, with guidance from people like my friend Rodney Hide, my National colleague Don Brash, and myself on the select committee, we convinced the Labour Government that that was not very smart. Credit unions and building societies are involved in banking. It is only fair that they can talk about what they do, and so, as this bill is reported back, members will see that instead of restriction on the use of the words “bank”, “banker”, and “banking”, there are limits on the use of restricted words in name or title.

The select committee finally convinced the Labour Government to allow credit unions, building societies, and people involved in banking to talk about that fact, and, even in their trademarks, to use the words. But, if institutions are not banks and use the word “bank” in a trademark, they must associate with it a disclaimer so that everyone who hears their advertisements on radio or sees their advertisements in print can hear or see that they are not banks. There is a difference. Banks have certain prudential requirements and certain controls over what they can do, for good reason, whereas building societies, credit unions, and other financial service institutions do not have those same disciplines over them, and therefore do not offer the people of our country the same protections. There is nothing wrong with their talking about what they do. They do bank, and they do provide banking services, but they are not registered banks.

Finally, I say that this legislation as reported back from the select committee is sensible in the way it handles those terms—thanks to the work of the Opposition. It shows that the Government has a bit to learn yet on the restrictive legislation it seeks to introduce into this country.

When listening to members on the other side, it does not take very long to learn of the gulf that separates us from them. Dr Lockwood Smith’s comments about how he believes that Government should get out of people’s lives, and about how he believes in a society for the individual, just show the difference between them and us. In reality, those of us who conduct electorate clinics, and who speak to and meet our constituents, understand that one of the reasons that the economy is stable and that things are going well, particularly in provincial New Zealand, is that we have a Government made up of MPs who are very happy to listen and talk to people in ordinary New Zealand.

One of the really interesting things about this bill is the general support for it. I am pleased to see that attitude prevail, because this bill is about improving the bank, improving its investigative and information-gathering powers and abilities, and improving its ability to carry out its functions. It is about strengthening the board’s role in monitoring the performance of the governor, which is also very important for stability and forward-looking initiatives. I agree entirely with what the member who has just resumed his seat has said, in that the bill does not alter the fundamental provisions of the Reserve Bank, but it does most certainly enhance its role.

I am sorry if members opposite took offence when I stated the obvious. If one knows anything about the history of the major political parties in New Zealand, it will of course be obvious that we are different—and thank goodness that we are, otherwise we would not have the strong, robust, and vibrant democracy that we have in this country. Regardless of our personal philosophical differences, I think that both Labour and National will work to preserve that for our country.

This is a bill that is important to the fundamentals of the New Zealand economy. It is good to see that we have a strong economy in this country. It is important that we get this bill through, and progress our legislative timetable. I certainly commend the bill to the House.

I am pleased to support this bill on behalf of the Green Party, but I am not very happy with Lockwood Smith’s contribution, because I thought it was an extraordinary attempt to rewrite history. It was fascinating to watch Lockwood Smith wax lyrical in his last 2 minutes—and he was doing well until the bell—and to watch Don Brash looking increasingly uncomfortable. Dr Smith tried to claim that National had something to do with restoring the words “bank”, “banking”, and “banker” for the credit unions and the building societies. Lockwood Smith may not have been at the same meeting I was at, where the previous Governor of the Reserve Bank was absolutely adamant that we should stop credit unions and building societies from using those very words. I put my money on the previous Governor of the Reserve Bank having a big hand in drafting the bill in the first place that promoted the idea that credit unions, building societies, and the PSIS lose the right to carry out their lawful business and promote their services to customers.

Dr Smith should reflect again on his outrageous claims that it was National that forced the Labour Government to make that change. It would be more truthful to say it was the previous Governor of the Reserve Bank, Dr Brash, who wanted to have those words taken out of the Act. I think the Government missed an important point there, but that was dealt with very eloquently by all the submissions that we received, particularly from the credit unions, and from the Financial Services Federation representing the building societies and the PSIS.

Tonight has been an interesting case in point, with lots of people trying to claim credit for fixing up that particular aspect of the bill. I am going to join in and make some of my own claims, but I will come back to that in a minute. I will first comment on some of the other significant changes that are in this bill. We are pleased to see there are changes to the governance of the Reserve Bank. It is important to change the balance of power so that the governor is not also the chair of the bank, and to remove the deputy governor from the board. It is also a good thing to require the board to report annually on the performance of the bank and the governor. We support all those changes to the Act.

One of the most interesting and perhaps most powerful changes to the legislation is clause 18, which inserts new section 77A, “Changes of ownership”. It will be very interesting to see how Alan Bollard deals with that provision if Lloyds TSB does proceed with the sale of the National Bank. Section 77A gives the Governor of the Reserve Bank extraordinary powers to influence any change of ownership of a bank in New Zealand. For example, a person—and that is a legal person—must obtain the written consent of the bank before a transaction could result in that person acquiring a significant influence over that registered bank, or increasing the level of significant influence. The bank has the power to impose terms and conditions that it thinks fit, which will create a very interesting situation for the Governor of the Reserve Bank. At the very least, I believe that the governor needs to ensure that any change of ownership of the National Bank should lead to the new bank being a New Zealand - based company, not another branch of an Australian bank, as we put up with at the moment with most of the other commercial banks in New Zealand. Better still, we believe that the governor should require that the new National Bank should have majority New Zealand ownership, so that it would truly be a national bank.

We put a challenge down to the Governor of the Reserve Bank to exercise his new powers under new section 77A wisely and cautiously, but also in the best interests of New Zealand. What could be in the best interests of New Zealand more than New Zealand having a nationwide commercial bank owned and operated by New Zealanders, investing in the New Zealand economy, and returning the profits of that operation to New Zealand shareholders, rather than all those profits continuing to leak off shore?

I will now return to what are relatively minor clauses, but, none the less, critical clauses in respect of building societies and credit unions. As I said earlier, I would like to claim primary credit for the changes that did take place, because despite the credit unions and building societies putting forward what I believed to be compelling and very eloquent arguments in their submissions, the officials still reported back that they did not want any change to the bill. I am sure that other members of the Finance and Expenditure Committee will acknowledge it was at that point that we went through a rather protracted debate, over several weeks, to see how we could indeed allow those organisations to continue to do what they do well.

The process went along these lines. Firstly, the Financial Services Federation, which represents 32 institutions in New Zealand, particularly the building societies and the PSIS, and which has assets of $10.5 billion, pointed out the obvious—namely, that stopping those organisations from using the words “bank”, “banking”, or “banker” in any of their slogans would lead to real economic disadvantage to them. Credit unions followed through by pointing out that such a restriction would be anti-competitive, it would severely disadvantage credit unions, and it would likely have a negative impact on those organisations. Members should bear in mind that credit unions have 183,000 members in New Zealand, and assets of $418 million, so they are not fly-by-night organisations, and they ought to be allowed to use straplines such as “Banking Where You Belong”, and, in the case of building societies, simply “Banking”.

So they put their case, and we listened to it. The National Opposition members were quite happy to dismiss the concerns raised by the credit unions and the building societies, because members opposite are wedded to the big overseas multinational banks and are not particularly interested in the mutuals and cooperatives that the people of New Zealand support when they have the opportunity to do so. The officials stuck with their line, but members such as myself were determined to turn that around. With the support of Graham Kelly, who has been involved in a credit union, Gordon Copeland, Craig McNair from New Zealand First, and David Parker from Labour, we did manage to shift the ground over a period of weeks. It was difficult to find the right balance to ensure that the organisations could promote their services in competition with the big foreign banks that National is so wedded to, at the same time as providing some protection for customers.

I think that we came up with the perfect solution. I certainly recall that it was I who came up with the solution that, on the one hand, any credit unions or other institutions—and not just building societies, but private banks—would have to specify in their advertising that they are not a registered bank, but, on the other hand, we would allow them to continue to use the keywords “bank”, “banking”, and “banker”. That was the happy compromise that the committee was able to reach agreement on, and it was something the Reserve Bank could live with and the Minister could live with.

In echoing what Rodney Hide said earlier, it was very much a case of MMP in action, and before us today we have a bill that gives us the right outcome. The only people who are upset are those in the big banks, who are clearly the ones who had complained to the Reserve Bank about the smaller competitors, but who really did not have any case to put up. Reserve Bank officials admitted to us that none of the complaints against the credit unions and building societies had stood up when they were investigated. So this is a victory for the little people. It is good to see that every party is supporting the bill. Ironically, it is good to see that every party, including the National Party, is claiming credit for helping out the credit unions and the building societies.

I would like to take a brief call on the Reserve Bank of New Zealand Amendment Bill’s second reading and just mention, because it is important, that this bill does improve the Reserve Bank’s ability to carry out its functions in both monetary policy and banking supervision areas. The bill does not alter the objective of monetary policy, which remains the promotion of price stability. The third point is that the changes will strengthen the board’s role in monitoring the performance of the Governor of the Reserve Bank and further enhance the Reserve Bank’s accountability and independence. I support the bill.

I want members to cast their minds back to 1988. Fifteen years ago I was just a young man in shorts and the Speaker of the House, the Rt Hon Jonathan Hunt, had spent only two decades in this House. We were the proud owners of the silverware—the Rugby World Cup. Buck Shelford had progressed to become All Black captain after David Kirk, and a very young and sprightly Donald Brash wandered into the Reserve Bank as governor. How did he get there? I ask that question. I hear the Labour Party members, who are looking at me, ask how did he get there. It was by a remarkable turn of fate.

Tonight for the first time, before this House and the public of New Zealand, I want to unveil the truth of how Donald Brash came to be Governor of the Reserve Bank of New Zealand. He did so with the support of Margaret Wilson, board member of the Reserve Bank. She knew quality when she saw it. She saw the twinkle in a very young Donald Brash’s eyes. She said: “We need him as Governor of the Reserve Bank.” She said: “If you want a good Governor of the Reserve Bank, then you need a man with intelligence and with skill.”, and she looked into Don Brash’s eyes and she melted. She said: “Absolutely, this is a man with skill and intelligence.”

But he was not just a good governor. He could have gone to the next level—that is, a great Governor of the Reserve Bank. But he was not a great Governor of the Reserve Bank. He is a man of courage, commitment, and ability. No, he went right out there on the bell curve, right in the 99th percentile. He was outstanding. He was one of the greatest New Zealanders ever to govern the Reserve Bank, and he did it because Margaret Wilson gave him the opportunity to do so and to this day he is for ever grateful. Whenever the National Party caucus starts in on her, he, for one, always stands and says: “I want to thank Margaret Wilson. I want to thank her for the opportunity she gave me. She is a wonderful woman, and even if she gets a bit confused on other issues I forgive her.” That is what he has said since he came into the House.

In 1989, through the stewardship of a Douglas Labour Government the Reserve Bank of New Zealand Act was passed. From that time, when inflation was 9.1 percent, with the brilliance of that outstanding governor, Don Brash, the country was shepherded through a period of low inflation. In 1991 we were between our targets of 0 to 2 percent, and only for a brief time did we exit up to the top end of the band with 2.6 percent.

It was an outstanding contribution. He is a fine New Zealander, and New Zealanders up and down the country are proud to have called him their governor. We are proud to call him a National Party member. He will be a very fine Minister of Finance. That is what is coming. I look into the eyes of the Labour members opposite and I see Jill Pettis can see exactly what Margaret Wilson saw those many years ago—how to recognise a fine New Zealander and how lucky we are to be in this House today. That is how it happened. But we are not here to talk about the 1989 Act, we are here tonight to talk about the 2003 Reserve Bank of New Zealand Amendment Bill.

💬 Richard Worth: Hurray for Don!

Exactly, hurray for Don Brash. So what are some of the specifics of this bill that would be of interest to members of this House?

💬 Hon Lianne Dalziel: When are you taking over from Bill?

I am not taking over from anybody at the moment. I do not know whether the Minister has noticed but I am last—26. But, anyway, let us not worry about my career, let us worry about the career of the Governor of the Reserve Bank as he goes forward.

The first thing this bill does is to remove the governor as chairman of the board. Now, that is an unusual thing worldwide. We do not see Alan Greenspan skipping into the Federal Reserve in the mornings thinking “Hello, I’m not’’—

💬 Rodney Hide: Skip?

Mr Hide is quite right, he does not skip that much at 77. We do not see him hopping into the Federal Reserve saying: “My goodness, I’m not chairman anymore.” But we have done that in New Zealand, and that is OK; we are setting an international trend. It is one of the things that will happen because of the Reserve Bank of New Zealand Amendment Bill, will be passed in this House in the months ahead.

The second person I want to make a very brief mention of is the poor old deputy governor. He is now being removed from the board. When he picks up the 2003 Reserve Bank of New Zealand Amendment Bill he will read of his departure. It is very sad indeed, but he will still play a very strong role. The Reserve Bank has a very fine deputy governor at the moment, but that position will be gone from the board.

What I do want to talk about for just a moment are the words “bank”, “banker”, and “banking”. Rod Donald stood in this House just a few moments ago and waxed lyrical about why the Green Party supported that provision, why National had challenged the words “bank”, “banker”, and “banking” as they stand in a trademark, and why we were wrong to challenge that. We were not wrong to challenge that. When the people of New Zealand go to a bank and look at a trademark they rely very heavily on those words. Name trading is a significant part of the banking industry in New Zealand. In my opinion, if someone sees a title that has “bank”, “banker”, or “banking” in it as a trademark that person is entitled to understand that it is backed up by strong supervision and that his or her money is safe. People are entitled to expect that they will not be led down a path of deceit, as we have seen from so many financial scams around the world. I stand in this House to protect poor, innocent, hard-working New Zealanders—my constituents—and we were right to be at the select committee and to make that challenge. We were right to challenge that provision, and if Rod Donald is questioning our ethics, then he is wrong, because we were right to do that.

For a moment I want to talk about the Continuous Linked Settlement service, which is a very interesting issue that is covered in the bill. Members will be aware that foreign exchange markets involve the buying of one currency and the selling of another. In a simple transaction, if one were to buy New Zealand dollars and sell US dollars, one would need to make what is called the payments. For instance, one needs to receive into one’s bank account, say, NZ$10 million, and on the very high exchange rate we have at the moment of roughly 59c against the US dollar, pay that $5.9 million into the US bank account. The period of time when those transactions may take place in New Zealand will be within our banking hours of 9 a.m. until 3 or 4 o’clock in the afternoon. However, at that time the bank in the US where one holds one’s account, or “Nostro” as it is known in the industry, is asleep. It lies dormant in the US, because people are no longer at work at that time.

That period of time where people may receive New Zealand dollars and pay away US dollars is known in the industry as the Herstatt Risk. It is named after the German Herstatt Bank, which went into default. It had paid away some transactions and not received others, and that created a huge liability. For years and years the worldwide financial services industry has faced Herstatt Risk in paying away billions of dollars before it has received the counter dollars on the other side.

This legislation will adopt an international trend called Continuous Linked Settlement. It is an international protocol and clearance system that will allow real time exchange for foreign exchange. It will allow the receipt of US dollars at the same time that New Zealand dollars are paid away. That will remove a huge contingent liability on the banking system.

National will support this legislation because we support strong monetary policy. Strong monetary policy must play its role in a strong New Zealand economy. We also support this legislation because Continuous Linked Settlement can provide some real benefits to the financial services industry in New Zealand.

Whenever we get an opportunity we will reflect on the wonderful contribution that the Governor of the Reserve Bank made in that time from 1988 to 2002. We can only hope that the new Governor, Alan Bollard, can follow in the great steps of that wonderful New Zealander Dr Donald Brash.

Bill read a second time.