Reserve Bank of New Zealand Amendment Bill (No 3)

This debate includes the schedules.

This is a very important, substantive part of the bill, but it is very much briefer in its coverage than Part 1 and I think we can deal with it fairly expeditiously.

The core of Part 2 relates to the transparency of the Reserve Bank’s reporting obligations, which are set out in very clear language centred on, in particular, the Financial Stability Report and the regulatory impact statements. Although we can safely assume that those reports have a tiny audience, it is an audience of great importance to our country, as it would be in any country, because financial stability rests on having transparency and an information base. Experts in other institutions, such as the international financial institutions the IMF and the OECD—which report, as they should, regularly on monetary policy in New Zealand—as well as overseas investors, domestic investors, and a whole host of companies do actually need to see very clearly the key bits of the information puzzle. So the legislation around this issue, although it is not of general public interest, is certainly of immense importance to the general public, because it is one of the foundation stones of the financial stability of this country.

Let us not overlook the fact here that in the midst of the really very, very sad tales about people losing their savings in the non-bank financial sector—something we have just discussed at length in relation to Part 1 of this bill—my recollection of the share of total savings in the banking sector, as opposed to the non-bank deposit taker sector, is that the figure is even higher than the one my colleague Mr Foss gave. I am not 100 percent sure, but I believe it is well above 90 percent. But whatever the actual figure is, we have to be grateful for the fact that for the most part, and so far—and I guess we should be touching wood when we say this—the financial stability of this country is pretty sound. We are tidying up areas here, we are strengthening areas here in the non-bank deposit taker sector, and we are strengthening the transparency procedures that underlie the whole system. But the fact remains that despite the concern that our banking sector is dominated by Australia, I think one would have a hard job to persuade New Zealanders who had just lost their money in a New Zealand financial institution that somehow they were better off, because they had lost their money in a New Zealand institution, than the people whose assets were being protected in an Australian-owned bank.

Part 2 is very, very technical. If we look briefly into the language used in Part 2, we see there is a requirement that the Reserve Bank report on all matters relating to the soundness and efficiency of the financial system, and on other matters associated with the bank’s overall prudential responsibilities. I know that those bank reports are pored over by highly technical people, and their assessments of the information contained in them are absolutely critical for the whole operation of our economic system. So the National Party is pleased to be supporting this legislation.

We also note the changes that have been made in respect of the Reserve Bank’s dividend. Obviously, the bank is in a highly privileged position as the sole issuer of currency. It makes seigniorage from that operation. In fact, if members go back through time they will find that throughout earlier parts of our antecedent political history that was a traditional source of financing for Governments before the invention of direct income tax. Seigniorage is an ancient form of revenue for the Crown, and the principles are now set out even more clearly, to determine what the appropriate dividend to the Crown is. I think that matter is extremely uncontroversial, and we welcome the slight clarification of it. Thank you, Mr Chairperson.

I rise to take a short call on Part 2. Like my colleague Tim Groser, I can move through this part expeditiously. Part 2 has two key parts: firstly, it deals with the determination of the Reserve Bank’s annual dividend back to the Crown; and, secondly, it deals with the timing of financial stability reports and the importance of them.

In terms of the first part, which deals with the bank’s annual dividend, at present the bank calculates the dividend in accordance with a legislative formula. I take this opportunity to say to the Minister in the chair, the Hon Shane Jones, that given his financial background and the time he spent as chair of the Finance and Expenditure Committee, I am quite keen for him to take a call to give us a feel for what that legislative formula entails, so that we can learn a little bit more about it. I ask the Minister in the chair to seek a call so that he can define how the Reserve Bank calculates its dividend in accordance with a legislative formula.

The formula-based determination does not always reflect changes to the bank’s balance sheet, market, and accounting, and in recent years it has not accurately reflected the amount that should be available for distribution back to the Crown. The committee has changed the provision to make it clearer. The amendments we recommend would allow the bank to determine the principles—which must be published in its statement of intent—upon which it would recommend the dividend. That is quite a change. The bank will have to define how that dividend will flow back to the Crown, and it will have to consider how its own balance sheet has changed because of the impact of the financial markets on it, rather than the dividend just being calculated in accordance with a formula—which I am hoping the Minister will take some time to define for us before we close off the debate on this part.

R Doug Woolerton: Shane will sort it out.

I am just acknowledging that the previous chairperson of the Finance and Expenditure Committee is a wise member of the House. I look forward to his call.

The second part of Part 2, which I will briefly touch on, is new section 165A, in clause 19. It deals with the financial stability reports and the timing of those reports. We have allowed more flexibility around the timing of them. Previously, they had to come out every 6 months, on a specific date. The section has been changed to state that “The Bank must, not less than twice in every calendar year,” publish one of these reports. They are critical reports. They are used by many financial organisations around the world to consider the state of the New Zealand economy; the likes of the OECD and various global financial credit agencies look at them in detail. Making sure that the reports come out in a timely fashion is important for our wider financial credit ratings, and I guess that it is important in relation to our OECD rankings, as well. That particular amendment is a small change, but it takes us forward.

That is the end of my speech on Part 2 of the Reserve Bank of New Zealand Amendment Bill (No 3). Thank you for the opportunity to speak, Mr Chairperson.

I raise a point of order, Mr Chairperson. I wonder whether we could give the Minister in the chair, the Hon Shane Jones, a copy of the Hansard for this debate, so that he could address the questions we asked the previous Minister in the chair.

The CHAIRPERSON (Hon Clem Simich): I call Craig Foss.

It was worth a try! Speaking to Part 2—and, yes, I have spoken a fair bit on this part; I was on a bit of a roll before—I note that Mr Tremain alluded to the dividend that the Reserve Bank pays, and also to the statement of intent that it has to produce. Mr Tremain started to describe how the dividend payment will be changed, and that is all very fine, but the size of the dividend depends on whether there is an excess of revenue over expenditure—I was going to say “profitability”, but that would not be right in the Reserve Bank’s case. Hopefully, it is positive. That drives what the bank pays back to the Crown. It will be interesting to see.

I ask the Minister in the chair, the Hon Shane Jones, whether there is a charge on the capital that the Reserve Bank has. The Reserve Bank will now have $2 billion of taxpayers’ capital tied up in order for it to manage and run its operations. A hospital or district health board, for example, has to pay a charge of between 7 and 10 percent on the use of capital. I would be very interested to hear the point of view of the Minister in the chair on that.

In the recent Budget $600 million extra of taxpayers’ capital was allocated to the Reserve Bank to enable it to carry out its operations. I was quite concerned about that. Many people were not aware of it. It has had some publicity now, and the Reserve Bank has explained to the public why it needed that amount. But it is worth noting, because there has not really been a debate on it, that $2 billion of capital is now allocated to the Reserve Bank. That is capital that cannot be used to help fund infrastructure—to help pay for hospitals, schools, etc. That money is tied up with the Reserve Bank, and at risk. I freely admit that it is very conservative with that capital, and one would expect it to be. However, I am somewhat concerned that we have not had a public debate about the matter. The outcome of that debate may be that, yes, it is absolutely fine, but it did seem to slip below the radar. If the Reserve Bank lost some funds in the course of its operations, be it through bonds that it has invested in, be it through foreign exchange that it is engaged in, or be it through the money supply that is out there, that capital would start to be eaten.

The Reserve Bank was given $600 million because its bond portfolio was massively under water when it marked to market. All Government accounts now have to be produced under the International Financial Reporting Standards, so the bank had to put that money up as if it were for sale. The difference in respect of the money it spent to buy all those Government bonds versus the value of those Government bonds today is a huge negative hit to the taxpayer. The Reserve Bank argues, and fair enough, that it holds those bonds until maturity, so it will always achieve the principal—assuming that the Government is still in place, and let us hope a Government is in place to do that. That is fair enough, but this issue should have been considered when the International Financial Reporting Standards were adopted for all public accounts in New Zealand.

Members will note that even the Auditor-General has raised serious questions about the application of mark-to-market valuations to public sector accounts, and that is a typical example of the problem. Landcorp is very open about its problems with it, but we can take it right down to the level of our local councils, which have huge issues with it, because it imposes a huge compliance cost upon them.

Regardless of how the dividend is structured and calculated, the amount depends on the operations of the Reserve Bank and what is at risk. Given the pressure that non-bank financial institutions will be under because of this legislation, the Reserve Bank should put itself under the same framework. The fact that it needed much more capital to fund its operation, because of an accounting change, shows that it was undercapitalised from the start. I know that the Reserve Bank has assured us that its prudential ratios are very, very conservative and absolutely fine—we all know that—but $600 million suddenly disappeared from the Crown bank account to it, to allow it to continue its operation and to expand.

We also know that the Reserve Bank has a short New Zealand dollar position of $4.2 billion—$4.2 billion in foreign exchange. I know why it is doing that, and that is absolutely fine, but does New Zealand understand what is at risk? That is a debate we need to have. I am not saying it is wrong and I am not saying it is right, but we have had big discussions about the purchase of New Zealand Rail—$650 million, and counting—yet $600 million was parked with the Reserve Bank and there was hardly a whisper, apart from two articles in the National Business Review.

Finally, I would like to take issue with the changes to the Act in terms of the statement of intent. The intent of the Reserve Bank, as most people understand it, is to keep inflation between the 1 and 3 percent band. Actually, that is not its intent, at all. The public needs to understand that the job of the Governor of the Reserve Bank now is to ensure that forecast inflation is between 1 and 3 percent over the next term, which is basically 3 years. The effect of that has been to have forecast inflation of 3 percent, rather than inflation being capped at between 1 and 3 percent, which is what most people understand to be the case. Yes, that might sound a bit boring and technical, but it has huge ramifications. It creates uncertainty, because when we calculate the value of something in 10 years’ time—infrastructure investment, for example—the higher inflation and interest rates are, then the less viable that investment is. That is why we need certainty that inflation outcomes will come within the band, which is what has been agreed at the moment. High inflation is devastating. If we look at the interest rate curve in New Zealand, and at the viability of many projects, we see that they do not work, and that is the core reason why.

I would like to have another read of the statement of intent of the Reserve Bank, to measure its outcomes versus its intent, because inflation has been outside the 1 to 3 percent band many times over the last 2 years, and it is forecast to be outside it for at least the next 12 to 18 months. That is devastating for New Zealand. It is devastating for our older folk who have funds invested, because inflation eats financial savings. It is devastating for the first-home buyer, who is trying to get ahead but has to borrow at an interest rate of 8 or 9 percent to obtain a mortgage. That is why it is devastating, that is why we need to be totally vigilant, and that is why the provisions in this bill need to be comparable with the regulations and supervisory commitments of the rest of the banking sector. Thank you, Mr Chair.

Part 2 agreed to.

Schedule

The question was put that the amendment set out on Supplementary Order Paper 225 in the name of the Hon Dr Michael Cullen to the schedule be agreed to.

Amendment agreed to.

Schedule as amended agreed to.

Clauses 1 to 3