Thanks to Tim E for asking some useful questions on my last posting, to which I promised a considered reply – and have thrown in a more respectful title.

Let’s begin by recalling the central issue.

The question is whether there is a prima facie case for the banks to answer.

 The Finance and Expenditure Committee was told by the Reserve Bank Gov. that there is enough persuasive evidence to justify putting serious questions to the banks. The committee appeared to share a common intention with that sentiment, so much so it declared its intention to hold an inquiry.

The Prime Minister has also raised concerns: “Our big aim is that if the Reserve Bank Governor does cut rates tomorrow that actually flows through to what consumers are paying, because in the last cut that Alan Bollard delivered it ended up with the banks and not with the consumers”.

So has the Minister of Finance: “Taxpayers are supporting the banks, and we want the banks to be able to demonstrate that they are going to support businesses and households through a tough time in the economy, even if it affects their profits a bit”.

In fact two of the major New Zealand banks agreed that an inquiry would be useful.

Mr Hickey may have some legitimate points, however they do not adequately address the concerns of the Reserve Bank Gov, or the concerns of the 86% of respondents to an NZMEA survey, or the concerns of the many New Zealanders struggling in the current economic climate.

I think that most New Zealanders look at the OCR at 2.5% and want to know how banks can continue to profit at pre-recessionary levels while they are struggling to meet mortgage payments at 5-6%. A select committee inquiry would go some way to addressing these concerns and answering some of the questions that have been put to the banks.

With respect to Labour’s record in this area, there can be no argument that the economic climate that we face now is vastly different to that of the previous 9 years. We have been presented with new challenges and in many respects, greater difficulties. However, in light of the strained circumstances so many around the country find themselves in, I think MPs owe it to their constituency to ensure that concerns of the nature the Reserve Bank Gov expressed against the banks are met with the attention they deserve.

Nevertheless, Tim E asked for some more detail on Labour’s activity in the banking sector.

Here are some examples:

Accounting for short-term volatility in RB oversight

As you point out, in 1999 under Labour the Finance Minister and the Governor of the Reserve Bank revised the Policy Targets Agreement. This introduced into sector 4c “[I]n pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate”. This change was to allow the Bank to look through short-term volatility and aggressive shifts in exchange rates.

Increased flexibility to react to foreign exchange movements

In 2004, the government supported moves by the Reserve Bank to broaden its foreign exchange intervention capacity, and provided $1 Billion in capital to the RB in support. The Government also provided an additional $1.9B of foreign currency reserves for the purposes of intervening to combat dysfunction in the foreign exchange market. It also ratified a Funding Agreement with the Reserve Bank to intervene in the foreign exchange market.

In 2007, the Reserve Bank moved to hold some portion of its foreign reserves on an unhedged basis, an “open FX” position, meaning that part of its foreign reserves portfolio would be funded in New Zealand dollars rather than in foreign currencies. This gave the Bank a more effective means of responding to crisis situations involving sharp falls in the New Zealand dollar.

Expansion of prudential coverage

Under Labour the Reserve Bank was encouraged to deepen its prudential oversight of the banking industry. The Labour Government also extended the Banks prudential coverage to include the non-bank financial products and advisors and financial intermediaries, with the legislation passed in 2008.

Capital adequacy framework

Under Labour, banks undertook moves to sure up their capital adequacy, taking account the risks they take, as required under the Basel II capital adequacy framework. These changes introduced incentives for banks to enhance their risk-management systems and processes.

Capital liquidity

In 2008, Labour introduced the Retail Deposit Guarantee Scheme and Wholesale Funding Guarantee Facility to ensure liquidity of the banking system. Under Labour the Reserve Bank also extended the underwriting guarantee, including a negotiated bilateral swap with the US Federal Reserve that, at my last count, backed $7.6 billion in assets.

The Labour Government took a relatively orthodox approach to monetary policy at a time when the prevailing conditions appeared that the policy framework was working well at the time.

A number of reviews of the monetary policy supported the Government’s view that on the whole the policy framework was appropriate to the conditions. These reviews included the 2000 Independent Review of Monetary Policy, and the Finance and Expenditure Committee Inquiry into the future monetary policy framework. Review of the regulation and performance of major institutions has also been part of work looking at closer integration in trans-Tasman banking regulation and supervision. Labour’s approach to banking policy was orthodox, responsible and appropriate for the time.

Finally, I would like to address the issue of “grandstanding”. I think it is important to take a more balanced view of what for many has been an annoying issue. As you can see from the above statements from My Key and Mr English they too consider this to be an issue. Nobody I’ve talked to has disputed the statement of either the Prime Minister or the Minister of Finance. Nor have they denied that the Minister has exerted his significant influence on his back bench colleagues to block the inquiry. Nor that the inquiry would be impotent.

The Reserve Bank Gov made the point explicitly and repeatedly, that they need to pass on more fully the OCR cuts to the short term variable rates. A select committee inquiry would provide a timely opportunity to get the details into the public view and give banks an opportunity to provide some transparency. To date the Government has done little more than embarrass itself and weaken its future leverage in the banking sector.

An update to add that the banks backing the inquiry were ANZ-National & BNZ. Westpac opposed it.